Updated: Nov 15, 2020
" Stitch Fix (Ticker: SFIX) the popular personalized online apparel company has seen a sell-off after its earnings release, however, is it time to invest in this company. "
By: Allan R Kirby
What is stitch fix and how does it work?
Stitch Fix touts itself as a modern personalized online apparel company. Their service helps keep their customers' wardrobe up to date with stylish clothing. All customers need to do is go online, fill out a survey about their style preferences and then a stylist at the company picks five clothing and accessories items to send to the customer for a one-time styling fee. A very simple and seamless process that its current 3.5 million customers love.
The online personal styling services have been popular because they leverage algorithms and data science to provide a personalized experience based on a customer's budget and style. As a result, the company has been hugely successful since its founding in 2011 and subsequent initial public offering in 2017 under the ticker SFIX. Today the company has a market cap of $2.7 billion.
Reported revenues of $443.4 million vs $414.9 million expected by analysts, 10.6% adjusted Year over Year Growth.
Gross Profit of $199.1 million 44.9% of net revenue.
Loss per share of $0.44 instead of an expected loss per share of $0.16 or a loss of $.28 more than expected.
3.5 million active clients which is an increase of approximately 8.8% year-over-year.
Gross margin was 44.9%, representing a 410 basis point increase quarter-over-quarter, driven by a reduction in our inventory.
Stitch fix ended the quarter with $381.6 million in cash, cash equivalents, and highly rated securities.
Did not provide detailed full-year and first-quarter guidance.
Overall it was not a bad quarter, when compared to many other apparel companies, Stitch Fix is doing well. Additionally, there were some positives provided in the letter to shareholders that includes the following.
Interestingly analysts did not mention the progress the company has made in the UK. As mentioned in their letter to shareholders the "U.K. offering enhanced its recommendations and inventory assortment, resulting in a year-over-year increase in average order value of more than 40%." I get it, it's still very early but holds promise especially given the difficult environment with Covid-19 and Brexit in the UK. The company invested $25 million in supporting the U.K. category.
Some additional Positive highlights
I was advised that Stitch Fix is a back to work and going out play, however the company has adjusted since Q 4 ’20 , women’s activewear revenue grew by over 350 % year -over -year, on an adjusted basis. In addition "As traditional Plus channels contract due to store closures, we saw higher demand in Q 4 ’20 with Plus first Fix growth exceeding 35 % year over year, on an adjusted basis."
Unfortunately, the company did not provide specific full-year guidance "given the continued uncertainty in the macro-environment, we think it’s prudent to hold off on providing detailed full-year and first-quarter guidance at this time." Stitch Fix also said in its shareholder letter that "it expects year-over-year revenue growth to accelerate meaningfully in the second half of fiscal 2021 as the impact of COVID stay-at-home orders subsides." The lack of guidance is never a positive thing however they did mention that for Q1’21 "we expect to deliver mid-to-high single-digit revenue growth, which reflects robust recent demand trends, offset by
lower subsequent Fix volume"
Why is stitch fix stock dropping?
From its March low of $10.90, the stock had run all the way up to a high of a 52 week high of $31.60 just before the earnings release. The stock was priced to perfection and given the results, it's not surprising to see a big sell-off. There could be additional downside risks as the timing of stitch fixes earnings release is happening amid a broader market sell-off. Expect to see this stock pressured for a few weeks however we do not expect to see this stock returning to its March lows. With the sell off the stock is actually up 3% for the year.
Is Stitch Fix a good stock to buy?
"In Q 4 ’20, the Women’s category drove first Fix growth of approximately 25 % on an adjusted year -over -year basis and maintained elevated auto-ship retention levels", this shows they are still driving growth. Secondly, this is a company that's profitable, we do not expect to see continue losses, this may have spooked some investors.
Stitch Fix has an average price target of $29 with no sell-side analysts calls, clearly, analysts still like the stock and we see nothing wrong with owning the company. With a healthy balance sheet, a complete direct to a consumer distribution system, strong brand recognition, this is a stock worth looking at. Additionally, we believe the continued accelerated trend of online shopping as a result of Covid-19 is a tailwind for the company. Additionally, this company will benefit from a reopening when a vaccine is found as people will need to update their working and evening wear.
We have no concerns with the recent sell-off given the run-up before the earnings release. The current market market-wide sell-off doesn't help either. Although the stock could be pressured near term, given the trail winds along with the great revenue results the stock should stabilize. We believe this is a company that will not only survive but continues to grow long after the pandemic.
Stitch Fix (SFIX) is a growth stock and does not pay a dividend, you are paying for growth. So is stitch fix a good buy? We believe this is a good stock to own as a long term investment. Potential investors should take a serious look at this great online apparel company as an investment. Do your research and see if this great stock is worth adding to your portfolio.
Apparel Stocks to Buy
There are other highly rated ESG consumer discretionary stocks that are doing well in this current environment such as Levi Strauss & Co. (LEVI) and Tapestry Inc (TPR). These may be other stocks to take a look at.
Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about the stock mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.