Stitch Fix (NASDAQ: SFIX) has hit the headlines on Wednesday after a disappointing earnings update. The business has swung to a loss amid declining revenues and a shrinking customer base, with its share price having declined by more than 75% across the year to date.
But does the company’s ongoing transformation make SFIX stock a good investment?
What Does Stitch Fix Do?
Stitch Fix sells a range of apparel, shoes and accessories through its website and mobile application in the United States and the United Kingdom.
It offers denim, dresses, blouses, skirts, shoes, jewelry and handbags for men, women and kids under the Stitch Fix brand. However, instead of operating solely as a traditional store, the business takes the form of an online personal styling service.
The business says it combines data science and human judgment to deliver apparel, shoes and accessories personalized to our clients’ unique tastes, lifestyles and budgets.
The company was formerly known as Rack Habit Inc. and changed its name to Stitch Fix, Inc. in October 2011. Stitch Fix was incorporated in 2011 and is headquartered in San Francisco, California.
How Does Stitch Fix Make Money?
Stitch Fix’s customers interact with the business in two primary ways. The first is using the company’s online and app-based store to purchase items with the assistance of a personalized assortment of outfit and item recommendations.
The second is by signing up to receive a personalized shipment of apparel informed by the company’s algorithms and sent by a Stitch Fix stylist. Clients can choose to schedule automatic shipments or order a shipment on demand after they fill out a style profile on the company’s website or mobile app.
The company says that it offers merchandise across multiple price points and styles from established and emerging brands, as well as its own private labels, which Stitch Fix calls ‘exclusive brands’.
SFIX Stock Financials
This company has a price-to-sales ratio of 0.24 and a price-to-book value of 1.33. These compare with respective retail industry averages of 0.24 and 3.59, according to CSIMarket, indicating that the stock could be slightly undervalued.
SFIX stock has fallen in price by more than 75% across the year to date, sitting at $4.72 at the time of writing. The last 12 months have seen the share price hit a high of $44.65 and a low of $4.61.
Stitch Fix does not pay a dividend to its shareholders.
SFIX Q4 2022 Earnings Update
Stitch Fix’s newly released earnings, which cover the three months ended 30 July 2022, did not make for a particularly positive reading. The company’s fourth quarter revenue came in at $481.9m, down from $571.2m in the same period in 2021.
This decline came as the business reported that its number of active clients had declined by 9% from the comparable period.
Additionally, selling, general and administrative expenses climbed from $244.7m to $291.3m. Consequently, the business swung to a net loss of $96.3m from a profit of $21.5m.
For the full year, Stitch Fix’s net loss amounted to $207.1m compared with an $8.9m loss in the prior year. The company ended the period with cash and cash equivalents of $130.9m.
The company also released guidance for the first quarter of its next financial year, stating that it anticipated revenues of between $455m and $465m. This would constitute a decline of between 20% and 22% on the same period 12 months prior.
Stitch Fix CEO Elizabeth Spaulding commented:
“Today’s macroeconomic environment and its impact on retail spending has been a challenge to navigate, but we remain committed to working through our transformation and returning to profitability. We are also capitalizing on every customer touchpoint to build long-term relationships and reignite net active client growth.
“Even in retail’s dynamism, our core differentiators — fit, discovery, and human relationships — remain as relevant as ever, and will further cement our place as the global destination for personalized online shopping and styling.”
SFIX Investment Risks
When the company exhibited slowing customer growth in March it was attributed to customer confusion surrounding the business’ recently launched direct selling operations and advertising difficulties stemming from Apple’s (NASDAQ: AAPL) changes to privacy rules.
Though the business has identified these issues, it does not seem to have remedied them in the intervening period as customer numbers are now not just decelerating but actively declining. While the customers the business retains or acquires are spending more, it is not enough to compensate for its shrinking base.
As such, there appears to be a real danger that Stitch Fix will fail to secure the customer growth it needs to spur revenues onwards. This is a challenge only made more difficult by the cost-of-living crisis, with fewer consumers likely to be willing to splash out on personalized style advice in tough times.
This challenging environment is reflected in the business’ decision to cut 15% of its workforce in June. The majority of cuts affected non-technology corporate roles and styling leadership roles, potentially pointing towards more of a pivot to e-commerce from personalized styling.
Speaking at the time, Spaulding commented:
“We are in the midst of a transformation and we know not every day or every moment will be easy. There will be tough choices along the way, and this is one of those.”
Is SFIX Stock a Good Investment?
It’s difficult to evaluate the potential of a business like Stitch Fix which is in the midst of a transformation.
On the one hand, the business is losing customers and revenue is declining fairly rapidly. The company swung to a loss in its most recent quarter and full-year, while its cash reserves don’t look exceptionally healthy.
However, the business has made cost-cutting efforts and is pivoting to the role of a more conventional e-commerce platform. It’s also attracting a higher spend from the customers it has managed to retain or acquire, while its share price is dwindling at near all-time lows.
In the end, the decision to invest in SFIX stock rests on whether the business looks like it can turn its fortunes around and carve a niche for itself in the already crowded world of e-commerce. Amid a challenging environment for consumer discretionary stocks, it’s obvious that this will be a very challenging job for Stitch Fix.
The 17 analysts covered by the Wall Street Journal who offer ratings for SFIX stock have a consensus rating of Hold, with an average price target of $5.75.