Can Stitch Fix (SFIX) repair the recent decline in investor confidence about its long-term viability? The subscription fashion retailer is set to report first quarter fiscal 2020 earnings results after the closing bell Monday.
One of the hottest IPOs in 2017, Stitch Fix shares surged during the summer of 2018, peaking roughly 240% above the company’s IPO price. Currently trading at around $24, Stitch Fix stock is now down some 54% below its all-time high of $52. Competitive pressures from the likes of Amazon (AMZN) has been cited as a reason why investors have exited their positions. Stitch Fix's gross margins has also come under pressure, declining in Q4 after multiple quarters of expansion.
The margins have fallen due to inventory investments, among other operational challenges. The company is also experimenting with a larger variety of styles as well as a "direct-buy" option that will be accretive to future growth. On Monday, Stitch Fix CEO Katrina Lake, who has done a solid job growing the company’s active clients base, must convince a skeptical analysts community that the subscription fashion retailer can be profitable. If she can successfully deliver this message, Stitch Fix, I believe, presents a buying opportunity for long-term investors.
For the three months that ended October, Wall Street expects the San Francisco-based company to lose 6 cents per share on revenue of $441 million. This compares to the year-ago quarter when earnings came to 1 cent per share on revenue of $366.24 million. For the full year, ending August, earnings are projected to be 4 cents per share, down from 36 cents a year ago, while full-year revenue is projected to rise 21.5% year over year to $1.92 billion.
While Stitch Fix's growth remains strong, as evidenced by the Q4 top- and bottom-line beat, investors were not particularly pleased with how the company ended its fiscal 2019. Stitch Fix stock plunged to all-time lows after the company issued weak EBITDA guidance for fiscal 2020. The company issued downside Q1 revenue guidance in the range of $438 million to $442 million, below consensus of $451.3 million.
The Q1 guidance overshadowed what were arguably many positive aspects of the Q4 report, namely the company’s active clients which came in 3.2 million, up 18% year over year. What’s more, thanks to its collection of extensive data, Stitch Fix is already profitable. The company’s personalization algorithm, which is improving over time based on consumer feedback, will give it a strong advantage over its competitors — a point, analysts at Wells Fargo recently made.
Wells Fargo, which has Market Perform rating on SFIX and a $24 price target, thinks the company’s direct-buy concept is poised to drive an acceleration in revenue growth over the next several quarters. On Monday the company will need to deliver on that message. The company must also show that the data collected on its 3.2 million customers can be leveraged into revenue streams beyond its specialties such as shoes, accessories, and tailoring clothing for harder-to-find sizes.
All told, to the extent Stitch Fix on Monday provides upbeat guidance for fiscal 2020, combined with a re-acceleration in revenue and subscriber additions, the company is poised to fix what doubters, focused on a quarter-to-quarter performance basis, see as long-term challenges.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.