The past few months have done serious damage to many growing stocks that have been a darling of investors throughout the pandemic. Stitch Fix (SFIX) is no exception here: The innovative fashion company, famous for sending a range of clothing to its customers to choose from, has experienced a dramatic fall from grace. Over the past year, the stock has fallen 80%. Over the past quarter alone, the stock has lost about half its value.
If you look at the Stitch Fix stock price chart, it might look like the definition of a falling knife. Of course, there are reasons for this drop, driven by both sentiment and fundamentals, but we have to wonder when the drop went too far and the Stitch Fix was reduced below its intrinsic value. In my view, it’s a great time for investors to take a second look at this company.
First, before setting the bar for what happened recently with Stitch Fix, remember the company’s long-term bullish drivers:
- Stitch Fix TAM handles are huge. The company estimates the apparel market size in the US and UK at $343 billion in 2020 and $472 billion by 2025. Below that, the penetration of online e-commerce is expected to continue to grow. In my view, Stitch Fix’s unique premise of sending designer-coordinated clothes that a customer can choose to keep or send back will continue to give it a brand advantage over other simple e-commerce stores.
- Category Expand. Stitch Fix has expanded its offering over the past several years to include menChildren and large sizes. The next batch of growth will be launched into new overseas markets.
- People are buying ‘outwear’ again. Part of the reason Stitch Fix has struggled in the immediate aftermath of the pandemic, unlike many e-commerce stocks, is that it’s primarily known for its “business casual” or work-oriented clothing. During the “cocoon” phase of the epidemic, these clothes did not sell well. Now that people have resumed normal routines, Stitch Fix is starting to grow.
- Direct purchase appears to result in higher ticket volumes. Average spend is rising among Stitch Fix’s growing customer base, and one reason for this is the “Freestyle” offering that allows customers to buy their clothes straight away without waiting for repairs. Continuing experimentation with Stitch Fix buying formats will help unlock a larger portion of its market.
Don’t lose hope here: In my view, Stitch Fix’s big share price cut should give investors confidence despite the underlying risks that have opened up.
Steering casts a dull light on 2022, but don’t count the chickens before they hatch
Now let’s get into the main reason why Stitch Fix stock has crashed over the past few months: Along with the company’s first fiscal year for the October quarter, the company has updated its guidance forecast for fiscal year 22:
The company’s forecast of $505-520 million for the second quarter represents a slim growth range of just 0-3% year over year. Additionally, for the full year, the company now reports growth at a “high single-digit rate,” which contrasts starkly with previous forecasts made by Stitch Fix, which call for revenue growth of >15% year-over-year. ; Additionally, expectations were for 15.7% year-over-year growth at the time of the earnings release.
One of the main challenges facing Stitch Fix is customer retention. During the third-quarter earnings call, Chief Financial Officer Dan Jeddah noted that some promotional efforts did not drive the customer retention that the company initially expected:
We increased the number of active customers to nearly 4.2 million, up 417,000 customers or 11% year over year. However, the 15,000 serial customer net additions were below our expectations. As Elizabeth briefly mentioned, since the introduction of the full Freestyle system, we’ve been iterating on the process of acquiring new customers and ways to set them up, and this has had an impact on consistent conversion.
Also, in the first half of fiscal 2021, we launched a high-dollar referral program for new customers, which eventually brought in customers who didn’t stay active for as long as we had hoped. We have since terminated the program. However, our client’s net additions were affected by this in the first quarter, and we expect to continue to see the effects of this in the second quarter.
Finally, we continue to address IDFA challenges in both historical and new channels as we develop our marketing strategy. We expect a sequential decline in activities in the second quarter and we expect active activities to return to growth in the third quarter.”
Despite these risks, I encourage investors not to reject Stitch Fix prematurely. Note that in both the United States and the United Kingdom, the . file The Omicron variant delayed the return to normal in schools and offices. Many universities start the winter/quarter semester in virtual form, while many companies have delayed their return to office plans or extended remote working arrangements for their employees. This means that many people are still “cocooned” at home, without having to buy new and more formal clothes. In my view, this will be a significant growth tailwind for Stitch Fix which may not be reflected in the current guidance.
Trends are strong so far
Moreover, the results provided by Stitch Fix so far have been solid. Take a look at the chart below:
Stitch Fix’s second-quarter revenue grew a solid 19% year-over-year to $581 million, directly exceeding Wall Street’s forecast of $570 million (+16% year-over-year) by a three-point margin. The company also expanded its active customer base by 11% year-over-year, while revenue per customer also grew 12% year-over-year, powered by the Freestyle platform.
CEO Elizabeth Spaulding also noted that the company is beginning to explore new marketing channels for customer acquisition, which can also help spur growth. Per her prepared notes on the third-quarter earnings call:
Finally, we build new marketing activation channels for the growth of new consumers. Historically, we have had access to a subset of customer acquisition channels as a result of our business model. These include verbal and performance-based channels such as Facebook and Instagram as well as incentive-based referrals. With the launch of Freestyle and the ability to share our product catalog as a tool for consumer engagement, we are now entering into a number of new marketing channels, including Google product listing ads, influencer marketing, and will eventually engage in SEO. “
Expense trends also continued to be favourable, with the company achieving a 2-point improvement in estimated year-to-date gross margins, while selling/general/administrative expenses decreased 2% as a percentage of revenue compared to the prior year first quarter.
As a result, Stitch Fix’s $38 million in positive EBITDA-adjusted earnings for the quarter represented a healthy margin of 7%, up six points from 1% in the year-ago quarter. Note that Stitch Fix’s guidance for fiscal year 22 only calls for 1-2% adjusted profit margins — so far, it’s off to a strong start in the first quarter.
Rating and main meals
At current stock prices near $16, Stitch Fix’s market capitalization is just $1.99 billion. After we deducted $400.5 million in cash on the company’s most recent balance sheet, Stitch Fix The value of the project is 1.59 billion dollars.
Meanwhile, for the current fiscal year, Wall Street analysts have revised their revenue forecast to $2.28 billion, which is 8% year-over-year growth (in line with the company’s forecast of “single-digit growth” for this year). Against this revenue forecast, Stitch Fix is trading at 0.7x EV/FY22 Yield.
I think that’s a completely pessimistic assessment of a company that has demonstrated a unique product-market fit, continues to grow its active customer base and produces medium single-digit positive EBITDA margins. Additionally, a recent $150 million expansion of the company’s buyback program, which currently covers approximately 8% of the company’s outstanding market value, should help lift sentiment.
In my view, the growth risks in Stitch Fix are more than offset by the decline in the stock price. Use a dip here to build a small position.