Stitch Fix Is not a staple for Fall

Stitch Fix reported decent quarterly earnings, but it is too soon to say if its growth bets will pay off

By guest author Laura Forman from Wall Street Journal

Stitch Fix’s SFIX apparel service gives clients a lot for a nominal fee, but its stock may not be the bargain it seems.

Ads for online apparel service Stitch Fix in the New York subway (caption courtesy by Wall Street Journal)

The e-retailer’s quarter showed like a pair of last season’s jeans: Acceptable, but nothing to get too excited about. Revenue of USD 432 million was in line with guidance and consensus estimates. Importantly, active clients grew 18 % from a year earlier to 3.2 million, meeting Wall Street’s expectations. The company also said it grew net revenue per active client 9 % from a year earlier—the fifth consecutive quarter of growth. Results benefited from an extra week in the reporting period.

Guidance for the fiscal first quarter ending Nov. 2 was light, as the company expects recent success with lower-priced items and less spending on marketing to drag on revenue in the early part of the fiscal year. Revenue guidance for the full fiscal year implied a second-half acceleration, while adjusted earnings before interest, taxes, depreciation and amortization included higher investments in its new U.K. business and increased marketing spending.

Investor expectations were muted coming into October 1, 2019 results. Stitch Fix shares have shed 55 % of their value over the past year and 36 % over the past three months. Short interest had risen to 40 % of the float, up more than 80 % since the company last reported results in June. While the stock rallied over 4 % into October 1, 2019 close—likely driven by anxious investors short-covering before the print—it traded down slightly after hours.

Stitch Fix shares certainly appear to be on sale. With an enterprise value under 0.9 times forward sales, the stock is currently trading in line with the average traditional apparel retailer, despite the business growing more than 20% annually compared with under 3% for the average traditional rival, according to SunTrust analyst Youssef Squali. Earlier this month, Mr. Squali said the stock’s recent drop-off offered “one of the best risk/reward opportunities” in small-to-mid-cap internet.

The market opportunity isn’t petite: Stitch Fix pegs its addressable market in the U.S. and U.K. at USD 431 billion. Still, competition is intensifying, particularly from the likes of The e-commerce giant, which officially launched its try-before-you-buy Prime Wardrobe platform in the U.S. last year, has been doubling down on apparel recently. It rolled out a styling service called Personal Shopper in late July for women, with plans to eventually expand to into men’s styling. The list of other competing services includes Nordstrom’s Trunk Club and plus-size Dia & Co, among others.

Stitch Fix’s stock may have been out of style with investors of late, but analysts remain largely positive, banking on new geographies such as the U.K. and newer verticals like children to drive longer-term growth. Still, the company has yet to provide much in the way of granular data on these new initiatives.

Buying shares now would mean embracing a promising trend early before knowing for certain if it will stick.

Stitch Fix reported decent quarterly earnings, but it is too soon to say if its growth bets will pay off

Ads for online apparel service Stitch Fix in the New York subway