• Stitch Fix founder Katrina Lake announced the company will be cutting 20% of its salaried workforce.
• Lake will also reassume her post as CEO. The brand's current CEO, Elizabeth Spaulding, will be stepping down effective immediately.
• Stitch Fix has seen waning sales and failed initiatives after a Covid pandemic boom.

Stitch Fix founder Katrina Lake on Thursday told employees the company will be cutting 20% of its salaried workforce and she will reassume her post as CEO as the fledgling apparel company continues to grapple with low sales, a dwindling customer base and a reduced market cap.

The brand's current CEO, Elizabeth Spaulding, who joined the company as president in 2020 and took over as CEO in August 2021, will be stepping down effective immediately, Lake said.

"I will be stepping in as interim CEO and leading the search process for our next CEO," Lake said Thursday. "Despite the challenging moment we are in right now, the board and I still deeply believe in the Stitch Fix business, mission and vision."

Shares of the company surged roughly 9% Thursday after the announcements and its market cap hovered around $386 million. Shares closed more than 9% higher at $3.50.

Stitch Fix, which sells curated boxes of clothing on a subscription basis, won big during the Covid pandemic after stuck-at-home consumers, newly flush with cash, took advantage of the service to update their wardrobes. But as shoppers ventured back out into the world, sales dropped and new strategies led by Spaulding failed.

Shortly after taking over as CEO, Spaulding led the rollout of a direct-buy option, called Freestyle, that allowed customers to purchase items directly from the company with the hopes they'd be won over as regular subscribers. But the initiative stalled and in June, the company announced it'd be laying off about 15% of salaried workers, or about 330 people.

The cuts left Stitch Fix with about 1,700 salaried employees, as of June.

Neil Saunders, managing director of GlobalData and a retail analyst, said in a statement Thursday that the company looks to have "lost its way" and that the issues it's facing are neither temporary nor immediately solvable.

"This is one of the reasons why the company has announced the termination of around 20% of its salaried positions – an action it hopes will help to stem losses and put the company on a better financial footing," Saunders said.

Stitch Fix employees learned about the job cuts Thursday morning and were told the brand's Salt Lake City distribution center, which has been open for just over a year, will also be shuttering. Approximately 150 employees at that center will also be laid off, according to an employee at the facility. The person spoke on the condition of anonymity because they are not authorized to speak about internal matters.

Staff at the Utah distribution center, which opened three months after Freestyle was launched in December 2021, got the news during their all-hands monthly meeting on Thursday morning, the worker said. Staff were "caught off guard" and surprised to hear about the layoffs because the facility hadn't been open that long, the employee said.

"They did good in my opinion. We had [an] all hands right before work and [they] gave us a packet with all the info we needed from final dates to severance. They even had a translator for our Spanish speakers," the worker told CNBC, adding they felt "overwhelmed" by the news.

When Stitch Fix shut down another distribution center in the past, some workers were given the option to relocate to different facilities within the company. It wasn't an option this time around for workers at the Salt Lake City center, the worker said.

Salaried employees affected by the cuts will receive at least 12 weeks of pay, which increases with tenure, and health care and mental wellness support will continue through April 2023, Lake said.

Lake told staffers she was "truly sorry" for the cuts and thanked them for their "hard work" and "dedication."

As founder, Lake has a unique perspective on the company and its potential, but she will have to contend with a consumer environment that has significantly shifted over the last year and a looming recession that'll see shoppers reduce their spending on discretionary items like new clothes.