Stock under pressure: Stitch Fix Inc (NASDAQ: SFIX)

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Stitch Fix Inc (NASDAQ: SFIX) stock fell over 0.8% on 21st September, 2018 (as of 12:50 PM GMT-4; Source: Google finance) while the stock plunged 11.57% on 20th September 2018 after Piper Jaffray downgraded its rating on shares of SFIX to “Neutral” from “Overweight” with a price target of $43.00 (from $29.00). The analyst steps aside as management has minimal room for error when it comes to execution given the tough Q4 comp setup. Murphy has noted that due to the high valuation there is little wiggle room for future execution, managing competitive threats, handling a macro/consumer spending slowdown, controlling rising customer acquisition costs and moderating full-price sell through as customers and vendors mix expands.

The analyst further commented that while he expect FY18 revenue growth to accelerate modestly over FY17 in absolute terms it will still likely be significantly lower than FY16 growth. The NA softlines market has significantly improved over the LTM (tracking up ~$15B Y/Y in CY18 vs. +$7B in CY16) and SFIX has launched many initiatives (categories, Style Pass, Extras, etc.) over that period, but SFIX dollar growth has decelerated from peak. As such, the analyst see potential FY16 marks peak revenue growth. If true, SFIX revenue growth would be less than 10% by FY25 at the latest.

For the third quarter of 2018, SFIX has posted active clients of 2.7 million, which is an increase of 30% year over year. The net revenue is of $316.7 million, an increase of 29% year over year in Q3 2018. The company has delivered the net income of $9.5 million and adjusted EBITDA of $12.4 million. The company has posted the diluted earnings per share of $0.09. Gross margin was 43.6% representing a 60 basis points increase from 43.0% in Q3 of last year. This improvement was largely driven by a lower inventory reserve expense, as a result of improvements to the inventory management. This is partially offset by a year-over-year increase in shipping and freight expenses and to a lesser extent

Meanwhile, SFIX has recently announced the expansion of its men’s assortment with new categories and sizes. The online personal styling service is adding to its active and outdoor apparel, tailored assortment and accessories, including the launch of Stitch Fix Men exclusive brand shoes, alongside neckwear, premium socks, belts and seasonal hats. The company in June also announced the launch of Stitch Fix Kids, timed for the back-to-school season. That is a challenge to Gap Inc., which has launched subscription services for babies and kids at its Gap and Old Navy banners and Target, which similarly has babies and kids apparel box services.

 

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