OAKLAND - Class action lawyers who sued clothing company Stitch Fix over a drop in its stock face a giant hurdle if they want to keep their case alive.
California federal judge P. Casey Pitts earlier this month dismissed the shareholder class action filed against the company, leaving lawyers until Sept. 13 to fix the problems with their case and file an amended complaint.
"These general allegations do not satisfy Rule 9(b)," Pitts wrote. "Without further details on the specifics of the internal tests, the Court cannot ascertain whether the executives' statements were misleading or if they made material omissions when speaking to their shareholders."
Bernstein Litowitz was picked to lead the case against Stitch Fix, representing lead plaintiff Retail Wholesale Department Store Union, whose funds lost nearly $2 million from its investment of more than 100,000 shares.
Bernstein Litowitz hopes to establish a class of those who bought stock in the company from Dec. 8, 2020, to March 8, 2022.
The start date reflects the launch of Stitch Fix's Freestyle Direct Buy program, which allowed customers to choose which items they wanted to purchase directly. Before then, customers purchased a monthly box of items chosen for them by a personal stylist, a product known as Fix.
"On Dec. 7, 2021, however, Stitch Fix admitted for the first time that the company had downplayed the magnitude of its transition from the subscription-based Fix model to the retail-based Freestyle model," the suit says.
"Stitch Fix further admitted that the company saw some 'short term cannibalization' from new customers who chose to use the new direct-buy Freestyle option rather than the traditional Fix option."
The stock dropped from $24.97 per share to $19 after that news, but the company allegedly led investors to believe it was a short-term problem.
On March 8, 2022, Stitch Fix disclosed a "weak outlook" caused by its app and site directing customers to the Freestyle program, the suit says. The stock price dropped even further, to $10.34 per share.
Defendants in the ensuing shareholder litigation included the company, former CEO Elizabeth Spaulding and founder Katrina Lake. They are accused of telling investors the direct-buy option would be complementary to Fix when knowing secretly from internal test results it would cannibalize Fix.
Stitch Fix successfully argued that statements by Spaulding and Lake weren't false because they addressed the complementarity of Fix and Direct Buy for existing Fix clients. The negative test results pointed to by the plaintiffs dealt with prospective consumers.
"In support of their contention that the statements at issue all dealt with the effect of Direct Buy on existing Fix customers, defendants note that Direct Buy was available only to existing Fix clients between June 2019 and April 2021," Pitts wrote.
Statements at issue include:
-Lake telling investors the "additive" combination of the two products would "allow us to address many more types of clients";
-Spauling in June 2021 saying "each new cohort of Fix clients are engaging faster with Direct Buy and it's expanding their spend with us"; and
-Spaulding three months later saying, "I think we see solid growth in both sides of the business in the coming year."
It was Dec. 7, 2021, when Spaulding first acknowledged that Direct Buy would experience the impacts of cannibalization, which caused a 24% stock decrease.