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Stitch Fix Lands in Hot Water Over ‘False’ Growth Prospects

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By Published On: October 16, 20180 Comments

Stitch Fix is facing a number of lawsuits from its shareholders over alleged claims of false/misleading statements made about its customer growth prospects.

The online styling service is facing at least two lawsuits in the US, as company shareholders question the accuracy of its third-quarter performance report and future growth capabilities.
Two suits have reportedly been filed with the US District Court for the Northern District of California, with at least one plaintiff being identified as Stitch Fix investor, Greg Sawicki.
According to the filings, Stitch Fix’s shareholders believe the company has been deliberately misleading about the strength of its active client growth, as well as its TV advertising plans. Concerns have arisen that the misleading nature of these statements could have a direct impact on the viability of Stitch Fix’s revenue and growth projections.
In June this year, Stitch Fix released its Q3 results, citing a 30 percent increase in the size of its active client-base, equating to a total subscriber count of 2.7 million. This successful growth rate was reiterated in October when company executives used this increase in active customers to justify the expenses associated with re-booting its TV advertising campaign.
However, the try-before-you-buy apparel service’s momentum was short-lived, with shares plummeting last month when investors started questioning the accuracy of the company’s earlier claims. This came after Q4 performance indicated customer acquisition and retention would continue to be costly for the online business.
The lawsuits in question allege the company’s growth prospects were not as positive as originally indicated,  the rate of client acquisition has drastically slowed, and that the defendants had not run the proposed TV advertisements for the bulk of Q4. As a result, it’s alleged the defendants’ statements were materially false and misleading.
Subscription-based services have historically proven difficult to maintain, with nearly 40 percent of consumers bailing on the services, according to research from McKinsey and Co. More than a third of these shoppers reportedly cancel their services within the first three months and half within six months, while only 45 percent of subscribers stick around for at least a year.
However, despite concerns surrounding the long-term viability of online subscription-based services, the latest PayPal mCommerce Index indicates they’re still in-demand in Australia.
Eighty-six percent of Australian businesses have reportedly experienced a significant increase in revenue after implementing some form of a subscription model. One in three of these companies has reportedly seen a 30 percent increase in revenue.
In Australia, only a fraction (11 percent) of retailers offer subscription services, which is understandable given the performance of e-tailers like Stitch Fix. Spectators believe that the hurdles faced by subscription-based services could be negated by e-tailer’s offering subscriptions as part of a broader product base.
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