Is Stitch Fix Stock a Reopening Play?

Stitch Fix NASDAQ: SFIX, the online personalized apparel retailer, is set to report its fiscal Q2 2021 earnings today after the bell. Shares are down more than 35% from their January 2021 highs, but are still up nearly 200% since the beginning of 2020.

Last Quarter Was Outstanding

In fiscal Q1 2021, Stitch Fix grew sales by 10% yoy to $490.4 million, beating consensus estimates of $481.2 million. The company guided for fiscal Q2 2021 revenue of $506 million to $515 million, up 12% to 14% yoy; the $510.5 million midpoint was above the $507.2 million that Wall Street had modeled.

For full fiscal-year 2021, Stitch Fix said to expect revenue of $2.05 billion to $2.14 billion, up 20% to 25% yoy; that entire range was higher than the $2.01 billion that analysts had been expecting.

Stitch Fix earned 9 cents per share in Q1, well above consensus estimates of a 20 cents per share loss. But when you back out a $28.1 million tax benefit from the Coronavirus Aid, Relief and Economic Security (CARES) Act, Stitch Fix lost 19 cents per share. Stitch Fix did not provide earnings guidance, but the company is expected to lose money for the foreseeable future.

The top-line beats, however, were enough to drive shares much higher – SFIX jumped 39% the day after the release. From there, shares more than doubled in less than two months prior to the aforementioned correction.

Before we talk about what to expect this afternoon, let’s examine why Stitch Fix has gotten so popular.

Stitch Fix’s Service Solves a Problem

 Some people love shopping for new clothes, but many see it as a waste of time. With people outsourcing more and more of their lives, why not outsource their shopping?

Stitch Fix has collected billions of data points to help it predict what its customers will enjoy wearing; its algorithms can look at thousands of items and narrow it down to a few that are likely to suit a customer’s style.

 The retailer uses this data to create a “fix” that contains five items. A customer receives the shipment, but it’s not as if they’re stuck with the items; anything they don’t like can be returned in a pre-paid shipping envelope. If a customer sends all five items back, they’re only out a $20 styling fee. But that fee is credited to anything that the customer keeps.

There is no long-term contract or obligation with Stitch Fix, making it easy to get started. Which is why Stitch Fix has acquired millions of customers.

Stitch Fix Looks Set for Post-Pandemic Acceleration

Last quarter, Stitch Fix’s average net annual revenue per client dipped 4% yoy to $467. Management attributed the decrease to a “surge of new clients who are still early in their spending journey.” The company recorded a sequential increase of 240,000 customers in Q1, increasing the active client count to 3.8 million.

Most of the retailer’s new customers have been satisfied. On the Q1 earnings call, management said, “We previously shared a measure that we internally refer to as a successful first Fix, which we define as the percent of clients who purchase at least one item in their first Fix and look forward to their second Fix. In each of the last two quarters, nearly 80% of our first Fixes met this criteria, which is the highest level we've seen in five years.”

The metrics indicate that Stitch Fix’s business is in good shape. But things are better than they look: Stitch Fix is doing all of this with people stuck at home. Post-pandemic, people will go out more, leading to increased demand for stylish clothing. Revenue growth could pick up in late 2021 or 2022.

How Should You Play Stitch Fix?

Stitch Fix is probably not going to announce impressive numbers this afternoon; high coronavirus cases and the winter weather likely kept demand in check over the last few months. But the recent correction indicates that investors have priced that all in.

You should expect investors to focus more on the long-term outlook. There is a good chance it will be strong, which could mark the end of this correction.