Stitch Fix made headlines when it listed on the NASDAQ in November 2017. It was the first female-led company to go public in over a year. Now the $2 billion San Francisco-based subscription company – which enabled consumers to submit size, budget and style preferences before receiving a box of five personally-styled apparel and accessories items that can either be purchased or returned – is facing a barrage of class action lawsuits, alleging that it violated federal securities laws by making “false and/or misleading statements and/or failing to disclose” material information about its growth rate, thereby resulting in financial losses for stockholders.
Stitch Fix – which was founded in 2011 by Erin Morrison Flynn, a former J. Crew buyer, and Katrina Lake, a veteran of Polyvore and management consultancy The Parthenon Group – revealed its fourth quarter 2018 financial results in a release dated October 1. According to at least 7 different complaints filed in federal court in California this month, “Stitch Fix conceded that, despite having reported on June 7, 2018, which was already a third of the way through the 2018 fourth quarter, that it had grown active clients by 180,000 quarter-over-quarter to 2.7 million, its active client growth rate had declined dramatically during the fourth quarter and remained virtually flat.”
Stitch Fix further revealed that it had “‘temporarily ceased [its] national TV campaign for 10 weeks’ during the 13 weeks of the 2018 fourth quarter, purportedly to ‘measure channel efficacy,’” a decision that the company confirmed “had a negative impact on new client growth during the quarter,” the complaints point out.
The following day, as a result of such disclosures, the stock price of Stitch Fix “declined $15.69 per share – more than 35 percent – on unusually high volume of more than 39.9 million shares traded, or more than 9.5 times the average daily volume over the preceding ten trading days. By the close of trading that day, more than $600 million in market capitalization had been lost.”
Stitch Fix’s declarations about slowing growth coincided with long-standing concerns among at least some investors as to the company’s ability to hold on to customers in light of its failure to routinely provide hard numbers as to its subscriber retention rate. Such uncertainty dates back to the time of Stitch Fix’s IPO when “investors demanded a discount amid concerns over the company’s profitability and transparency of its financial metrics,” a source familiar with the situation told CNBC.
The complaints filed by Robbins Arroyo LLP, Kaskela Law LLC, Gainey McKenna & Egleston, Bragar Eagel & Squire, P.C., Federman & Sherwood, Schall Law Firm, and Levi & Korsinsky, LLP allege that Stitch Fix “made false and/or misleading statements and/or failed to disclose that [its] sales growth prospects were not as positive as stated because active client growth had dramatically slowed, and [it] had ceased running a television advertising campaign for much of the fourth quarter of 2018.”
As a result, investors who purchased or otherwise acquired Stitch Fix securities between June 8, 2018 through October 1, 2018 have suffered financial losses, in some cases in excess of $100,000, and are able to join the various class action lawsuits, should they be certified by the court.
In addition to seeking class action certification to enable similarly situated plaintiffs to join the case, which sets forth claims of violations of the federal securities laws, the lawsuits are seeking damages, which, as required by class action procedure law, must be upwards of $5 million.
Stitch Fix is a play on an increasingly popular “subscription box” model, in which customers pay to have regular — often monthly — shipments of goods. While these models “are attractive because companies can forecast revenue, but many have struggled to balance sales against steep marketing costs,” CNBC noted last year.
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