Earnings

Stitch Fix (SFIX) Q3 Earnings: What to Expect

Stitch Fix
Credit: Stitch Fix

Shares of Stitch Fix (SFIX) have been punished over the past month, falling some 23% during the recent tech selloff. Aside from valuation concerns, given that the online clothing personalization specialist had at one point soared more than 200% since December, investors have also become concerned about rising competition and the company’s ability to sustain its impressive growth rate.

The subscription fashion retailer is set to report third quarter fiscal 2021 earnings results after the closing bell Monday. Investors will want to know whether the company can sow enough confidence to keep its stock from further unraveling. Also presenting a headwind is the fact that key executives such as the founder & CEO Katrina Lake, Paul Yee (served CFO for 2 years and 8 months), Mike Smith (President & COO) have all left the company since the start of 2020.

While Lake is still with the company as executive chairperson, the high management turnover has concerned the market, particularly amid the rate of slowing growth. With the shares now down 5% year to date and 51% below their 52-week high, this could be a buying opportunity. The company has recently moved into direct buy options to help not only vastly expand its total addressable market but also to speed up purchase decisions. This was a key growth strategy at the onset of the pandemic, which sparked lockdowns and accelerated store closures.

Stitch Fix’s direct-buy concept was seen as a significant competitive advantage amid stay-at-home restrictions. The company’s data-centric business strategy applies a group of 145 data scientists to build an algorithmically-driven engine to showcase personalized apparel options for active clients not wanting to search throughout the internet and stores to find desired clothing. But 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 27 cents per share on revenue of $510.54 million. This compares to the year-ago quarter when the loss was 33 cents per share on revenue of $406.66 million. For the full year, ending July, the loss is projected to be 57 cents per share, compared to the loss of 66 cents a year ago, while full-year revenue is projected to rise 20% year over year to $2.04 billion.

Stitch Fix’s goal is to revolutionize the way consumers buy apparel. To that end, the opportunity to expand its addressable market, which has largely gone unrecognized, has been Stitch Fix’s main focus. However, the rate at which it can expand and secure market share has been the biggest obstacle for the stock, particularly in the face of intense competition from, among others, Amazon (AMZN). Competitive fears crept up in the second quarter as the company missed on revenue, posting sales of $504 million, missing estimates by $8 million.

Other metrics such as net revenue per client which fell 7% to $467, was also a disappointment. As was Q2 adjusted EBITDA which came in at negative $8.9 million, missing consensus mark of negative $3.5 million. Investors sold off the stock by more than 15%. It seemingly didn’t matter that the company the number of active clients during the quarter grew 12% year over year to 3.9 million. It wasn’t a great quarter, not by any stretch. But if Stitch Fix on Monday can show signs of improvement in capturing market share and improved profit margins, the stocks can still be a winner.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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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