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Stitch Fix bets on kids to grow its subscription clothing business

Stitch Fix Inc. is moving further beyond its core womenswear business, hoping to grow revenue by offering clothes for children.

The subscription apparel service said June 7 that it will start offering kids clothing in time for a new school year in the coming months. Selections of clothes and accessories, which the company calls "fixes," will include between eight and 12 items for children — more than the five items it includes in fixes for adults.

"Well more than half" of Stitch Fix's current customers have children, meaning the company will be able to increase sales without all the costs of acquiring new customers, founder, CEO and director Katrina Lake told analysts during a call to discuss the company's fiscal third-quarter results.

The new offering will mirror Stitch Fix's venture into men's clothing, Lake said. Initially, it is likely that the company's sales of clothing for children will come with a lower profit margin, just as the men's business did when Stitch Fix launched it about two years ago, COO Mike Smith told analysts. Margins for the children's business will improve as the business grows, Smith added.

With its fixes for men, the subscription service also saw female customers "influencing men in their lives" to sign up for the service, Lake said. As it begins sending out selections for kids, the company is betting it will see a similar effect.

"Parents are the ultimate decision-makers with kids," Lake said.

The company also said June 7 that it had hired Deirdre Findlay to serve as the company's chief marketing officer. Previously, Findlay oversaw hardware marketing at tech giant Alphabet Inc.'s Google.

Broadly, Stitch Fix's third-quarter results beat analyst expectations, and the company raised guidance for the remainder of its 2018 fiscal year. For the three months to April 28, the San Francisco-based company reported diluted earnings per share of 9 cents, above the S&P Capital IQ consensus estimate for GAAP EPS of 3 cents.

Non-GAAP net income for the quarter totaled $9.5 million, above the S&P Capital IQ consensus estimate for GAAP net income of $2.7 million with five analysts reporting.

Revenue for the quarter was $316.7 million, beating the S&P Capital IQ consensus estimate of $306.7 million and rising 29.2% year over year.

The company also raised guidance for its entire 2018 fiscal year. Stitch Fix now expects revenue of between $1.22 billion and $1.23 billion, an increase of between 25% and 26% over the previous year, CFO Paul Yee told analysts. Previously, the company had said it expected revenue to grow between 22% and 25% for the year.

For its fiscal fourth quarter, Stitch Fix expects revenue to total between $310 million and $320 million, representing growth of between 20% and 24% year over year, Yee added.

Shares of the company were 6.3% higher at $20.90 in after-market trading June 7. Since its November 2017 IPO, the company's stock has risen nearly 30%, according to S&P Global Market Intelligence.