Shares of Stitch Fix (SFIX) have rebounded sharply, surging more than 100% since the market bottomed in March, which suggests investors are not as worried about the company’s long-term growth prospects as the share price once indicated. The question now is, can the company live up to expectations?
The subscription fashion retailer is set to report third quarter fiscal 2020 earnings results after the closing bell Tuesday. The company’s Stitch Fix’s direct-buy concept is now seen as a significant competitive advantage amid stay-at-home restrictions. Last week analysts Deutsche Bank initiated coverage on the stock with a Buy rating and a 12-month price target of $34 which calls for additional premiums of 20%.
"In our view, Stitch Fix is likely to be one of the biggest beneficiaries of the lockdowns and accelerated store closures, especially as it extends the Direct-Buy feature to non-subscribers over the next couple of quarters,” noted Deutsche Bank. “We believe this will materially expand its addressable opportunity, which has largely gone unrecognized, and which creates potential for SFIX shares to outperform peers."
What’s more, its data-centric business strategy is seen capable of driving an acceleration in revenue growth over the next several quarters, suggesting it can avert competitive threats from Amazon (AMZN), among others. For the stock to keep rising, however, on Tuesday the company must show sustained revenue growth acceleration, along with improved profit margins. Investors will closely monitor the company’s international expansion efforts to assess long-term growth prospects and profitability.
For the three months that ended July, Wall Street expects the San Francisco-based company to lose 16 cents per share on revenue of $414.54 million. This compares to the year-ago quarter when earnings came to 7 cents per share on revenue of $432.15 million. For the full year, the loss is projected to be 38 cents per share, compared to the loss of 36 cents a year ago, while full-year revenue is projected to rise 6.7% year over year to $1.68 billion.
But more importantly, however, Stitch Fix’s business strategy will need to show it can drive revenue acceleration. In the third quarter it reported revenue of $371.73 million. Not only did that miss analysts’ estimates of $406.66 million, it was down 9% year over year.
The Q3 adjusted loss per share of 33 cents was 50% higher than Wall Street’s estimate for a loss of 16 cents. That said, the negative numbers aren’t entirely surprising. After all, the quarter was during the middle of the coronavirus pandemic. But there were things to be excited about, namely, the company grew active clients to 3.4 million, which rose 9% year over year. Equally impressive, net revenue per active client rose by 6% year over year — the eighth consecutive quarter of growth.
These metrics suggests Stitch Fix has a loyal customer base that remain engaged despite the pandemic. But for the stock to keep rising in the near term, analysts on Tuesday will want to see higher revenues, along with confident guidance.