July 23, 2025 Stitch Fix Execs Hid Losses And Sold $102M In Stock, Suit Says
By Katryna Perera
Law360 (July 23, 2025, 8:43 PM EDT) — Stitch Fix’s top brass have been hit with a shareholder derivative suit accusing them of selling more than $102 million worth of company stock on insider information, as the company’s new purchasing option was undercutting and cannibalizing its core curated box subscription.
Melonie Schultz filed a complaint Tuesday against Stitch Fix’s founder and CEO Katrina Lake, its former CEO Elizabeth Spaulding and several current and former board of directors members.
Stitch Fix periodically sends customers a “Fix,” a box of five trial items of clothing curated by the company’s stylists. Customers can purchase the items or return them and they pay only for the items they keep, plus a “styling fee.”
According to the complaint, in December 2020, Stitch Fix launched the “Freestyle” program, through which customers could directly purchase individual clothing items without having to receive an entire Fix box. The company touted the direct buy program as a way to expand its market and deepen client engagement and said the program would “serve as another catalyst as we attract new clients, convert prospective clients and reactivate lapsed clients.”
However, Schultz says, the revenue generating promises never materialized and the only thing the Freestyle program did was turn Stitch Fix into “just another e-commerce retailer.”
“This drastically changed Stitch Fix’s business model and threatened Stitch Fix’s original business model as [the] Freestyle program cannibalized customers from its subscription business known as ‘Fix,'” the complaint said.
Stitch Fix continued to tout the Freestyle program and repeatedly denied claims that it was undermining the company’s legacy Fix business, according to the complaint. A year after launching the Freestyle program, insiders learned about the direct buy program’s effects. In tandem with that disclosure, the company announced a loss for the first quarter of 2021 and cut its full-year revenue projections.
That in turn caused Stitch Fix’s stock price to fall by $5.97 per share, or 24%, from $24.97 to $19 per share, according to the complaint.
Schultz says the truth about the Freestyle program was not disclosed to public investors until much later and through February 2022, the company claimed the experienced losses were short-term problems, that it had been “testing client onboarding flows” and that “we see significant new client potential ahead as Freestyle enables us to access a greater share of shopping occasions.”
Schultz said that as Stitch Fix’s “deteriorating performance became increasingly clear to management,” company insiders began dumping substantial amounts of stock.
“Despite having this knowledge of material nonpublic information, the insider trading defendants sold tens of millions of dollars of stock while concealing the fact that its business would soon experience severe headwinds with a concomitant stock price drop,” the complaint said.
According to the complaint, Lake sold approximately $70 million worth of Stitch Fix stock in 2021 alone, Spaulding sold roughly $1.4 million in shares and Director Mike Smith sold approximately $18 million worth of Stitch Fix stock.
“The insider trading defendants collectively sold approximately $102,049,877 worth of Stitch Fix stock during the relevant period,” the complaint said. “Had the insider trading defendants waited to make these sales until a month after the relevant period ended on March 8, 2022, their sales would have lost tens of millions of dollars.”
On March 8, 2022, Stitch Fix offered a weak outlook for its third quarter of 2022, again cut its revenue guidance for the full year and disclosed a “self-inflicted ‘friction'” between the Freestyle and Fix programs.
“Specifically, Stitch Fix explained that when customers visited Fix — the primary landing page for customers interested in the Fix box model — the company directed them to the Freestyle experience first, and ‘therefore, in leading clients to the Freestyle experience first, inadvertently created friction’ for potential customers interesting in ordering Fix,” the complaint said.
On that news, the complaint said, the price of Stitch Fix stock fell by $0.67 per share, or 6%, from $11.01 to $10.34 per share. The company’s share price continued to decline over the next few months, and by June 2022, the stock price had dropped by nearly 90% from December 2020.
The suit seeks disgorgement, restitution, damages, improvements and reforms to Stitch Fix’s corporate governance and internal procedures, attorney fees and a jury trial.
Stitch Fix is also facing a proposed class action over the Freestyle program’s alleged cannibalization of the Fix business model. Earlier this month, a federal judge allowed most of the suit’s claims to proceed, finding that investors have adequately made the case that the defendants knowingly made misleading statements.
Representatives for the parties did not immediately respond to requests for comment Wednesday.
Schultz is represented by Brendan M. Ford and Kristopher P. Diulio of Ford & Diulio PC, Lee Squitieri of Squitieri & Fearon LLP and Fletcher Moore of Moore Law PLLC.
Counsel information for the defendants was not immediately available Wednesday.
The case is Schultz et al. v. Lake et al., case number 3:25-cv-06152, in the U.S. District Court for the Northern District of California.
–Editing by Stephen Berg.