Buy Stitch Fix Stock on Weakness

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The shares of Stitch Fix (NASDAQ:SFIX) dropped in early June after the personalized styling company reported third-quarter numbers that were, quite frankly, awful. SFIX stock has retreated about 7% on the news.

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Stitch Fix’s Q3 revenues and earnings both came in shy of analysts’ average expectations. Its client base shrunk quarter-over-quarter, a first for this company. Its revenues dropped by 9% year-over-year, versus its history of 20%+ YOY revenue growth.

Stitch Fix’s revenue per client fell a whopping 17%, and its gross margins dropped 4.30 percentage points. Its operating spending rate rose by seven percentage points. Its EBITDA, excluding certain items, was negative, after coming in positive during the same quarter a year earlier.

Nothing about the results was positive.

But that’s as bad as it’s going to get for Stitch Fix. Indeed, its management said that all of its important business trends have improved since its quarter ended in early May.

Plus, the company is implementing smart, strategic initiatives which should boost its growth trajectory both now and over the long run.

I recommend that investors buy the dip of SFIX stock. The worst is over for the firm. Things will only get better for it from here. And as they do, Stitch Fix’s stock will rebound.

Brighter Days Ahead

Stitch Fix’s Q3 earnings report was about as ugly as it gets. Its user base shrank, its revenue declined, and its margins compressed. And its profits got wiped out.

But that was the bottom for Stitch Fix; its business will only get better going forward.

The company’s management said that fulfillment and backlog challenges hurt its revenue and margins in Q3; at the end of March, 70% of the company’s U.S. warehouse capacity had gone offline due to the coronavirus pandemic . But those difficulties are in the rear-view mirror. The company is essentially back to full capacity today and expects to work through its entire backlog by the end of June.

At the same time, its demand trends are improving. In April, its revenue growth accelerated each and every week. By May, the company was reporting positive YOY revenue growth again. Management expects this trend to persist and is expecting positive revenue growth in Q4.

Management anticipates that its gross margins will expand by three percentage points on the back of reduced promotional activity. It also expects its adjusted EBITDA to swing back into positive territory

Further, Stitch Fix’s new “direct buy” program  is gaining tremendous traction. That’s important because it offers Stitch Fix a way to add customers more easily and increase its customers’ engagement with it.  That’s because the initiative turns Stitch Fix personalized e-commerce fashion platform.

So looking at the big picture, while the Q3 earnings report was bad, all of the company’s trends are pointing in the right direction. The next few months will look a lot better.

Can Stitch Fix Stock Reach $30?

The company’s fundamental improvements could potentially drive SFIX stock closer to $30 by the end of the year.

Stitch Fix’s addressable market primarily includes U.S. households with income north of $75,000 per year. There are 55 million such households. Stitch Fix has just 3.4 million subscribers today, representing a roughly 6% penetration rate. Before this year, that penetration rate has been consistently increasing by roughly one percentage point each year.

Starting next year,  that trend of steady share expansion should persist. That’s largely because personalization is a megatrend to which more and more consumers are subscribing, while the direct buy program will expand the platform’s reach. Additionally, the direct buy initiative will also increase the company’s average revenue per client.

As its demand trends and revenue rise, while operating spending rates decline,  its gross margins will gradually improve and its profit margins will meaningfully climb.

My estimates indicate that Stitch Fix’s earnings per share can reach $2 per fiscal 2025. Based on a 20-times forward earnings multiple — which was the average for consumer discretionary stocks in previous years– and a 10% annual discount rate, that equates to a fiscal 2020 price target of about $27.

By the end of 2020, SFIX stock could reach around $30.

The Bottom Line on SFIX Stock

Stitch Fix is an innovative fashion tech company that is rapidly expanding its presence in the global apparel retail market, using personalization and data.

Its Q3 earnings report was awful. But it was supposed to be awful (overall spending on clothes by consumers dropped 89% in April). Going forward, things are going to get a lot better. As they do, SFIX stock will bounce back.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SFIX. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/buy-stitch-fix-stock-on-weakness/.

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