It’s been said that “patience is a virtue,” but applying too much patience can often simply become stubbornness. And in the stock market, stubbornness can leave investors holding the bag.
Although a case can be made that Stitch Fix (SFIX) stock is a bargain at current levels, investors who have watched the share price decline as much as 90% while waiting for execution are likely regretting they did. But with the stock now seemingly discarded into the bargain the bin and trading at historical lows, is it time to bet on a rebound? Ahead of its third quarter fiscal 2022 earnings results after the closing bell Thursday, that’s the main question analysts want answered.
Shares of the online personal styling company Stitch Fix have been punished over the past year, plunging almost 85%, including 15% decline in the past thirty days. Now down 55% year to date, against the 12% decline in the S&P 500 index, management must give investors a new reason to be patient. Aside from fears of competitive pressures having emerged, investors have become concerned about Stitch Fix’s ability to sustain profitability over time.
The company’s inability to effectively market its Freestyle product, which forced it to cut its guidance, is one glaring headwind. The product allows consumers to shop clothes on Stitch Fix via artificial intelligence data for immediate purchase, unlike the standard service where a package with four items are sent for customers to select from. To reverse the decline in the stock, on Thursday the market will want to see revenue growth acceleration, along with improved profit margins.
For the three months that ended April, Wall Street expects the San Francisco-based company to lose 54 cents per share on revenue of $493.29 million. This compares to the year-ago quarter loss of 18 cents per share on revenue of $535.59 million. For the full year, ending July, the loss is projected to be $1.34, compared to the loss of 8 cents a year ago, while full-year revenue is projected to decline 0.60% year over year to $2.09 billion.
Part of the stock’s decline stems from what investors have perceived as eroding fundamentals within the company. For example, at the start of the quarter, the full-year loss was expected to be 94 cents per share. The expected loss has since widened by 40 cents. Likewise, the full-year revenue was estimated to be $2.28 billion, which has since been lowered to $2.09 billion. Decelerating revenue growth, which triggered revising guidance lower, has been the main driver for the stock’s punishment.
The company has also been losing active clients. Most recently, active clients was reported at only 4.02 million, down from 4.17 at the end of fiscal 2021. As noted, the company recently launched its Freestyle service to help drive engagement and volumes. If executed correctly, the service can boost key metrics such as user engagement, average revenue per user, as well as expanding the company’s overall customer base. And that’s what Stitch Fix needs to revive revenue growth.
In the second quarter, revenue arrived mostly inline with consensus estimates, coming in at $517 million. However, it translated to 3% growth, while the Street was expected growth near 20%. Net revenue per active client for the quarter came in at $549, an increase of 18% year over year. However, that figure fell just shy of some estimates for 22% growth.
Evidenced by the recent price target cut and the downward revised revenue and profits for the full year, it appears Wall Street has become even more bearish. All told, Stitch Fix has a lot to fix on Thursday.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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