Stitch Fix (NASDAQ:SFIX) Slips a Stitch as Wells Fargo Downgrades

Clothing retailers have definitely had a tough run of things this year. With stores closed, online operations strained, and people reconsidering just how much they need in their closets, it's been sub-optimal all the way around. For clothing subscription service Stitch Fix (NASDAQ:SFIX), a recent hit to the analyst consensus prompted a slip in pre-market trading that it's started to recover from with the trading day's advance.

A Little Bit Threadbare

Stitch Fix lost about 4% in pre-market trading, after Wells Fargo dialed down its expectations on the company. Wells Fargo shifted its analysis from “equal weight” to “underweight,” which didn't bode well for the company going forward.

Prompting Wells Fargo's downgrade were, as you might expect, an unfavorable future outlook after the company had something of a banner year, seeing share prices up around 50% at one point. It's not that there was nothing to like about the company; indeed, as clothing retailers go, its exclusively online focus puts it in about the best position it can be in. However, the problem seems to stem from the company's overall business model, offering up a subscription-based clothing service that learns a customer's preferences.

Stitch Fix has a rather novel idea backing it up. Essentially, the company sends out clothes to customers based on their selections. Customers try the clothing on at home, keep what they like, and return what they don't. The company can then take that data, run it through big data analytics processes, and return new suggestions based on what the company has learned.

This gives Stitch Fix two different product lines. It can not only sell the clothing to its own customers, but also, it can take the data generated therein and sell the data to clothing makers. Clothing makers, from there, can take that data and use it to identify crucial parts for future product design, like women's clothing that has more pockets.

The Emperor's New Subscription Clothes

Wells Fargo, meanwhile, seems to be part of a minority, at least as far as our latest research can attest. The current consensus rating on the company is as it has been for the last six months: a buy. While the exact ratio of that buy has been slipping a bit, it's still a buy: the company currently has two “sell” ratings, five “hold” and 12 “buy” to its credit, while six months ago, it was seven “hold” and nine “buy”.

Perhaps not surprisingly, the price target has also been climbing. It's currently sitting at $27.18, which is well below yesterday's close of $39.41. Interestingly, movement on the price target front has been muted of late. Wells Fargo's downgrade comes just one day after Needham & Company upgraded to a “buy” rating and stepped up its price target from $34 to its new $46. Interestingly, even as Wells Fargo downgraded the company, it upgraded the price target from $18 to $27.

The Stay-At-Home Halo Effect

Stitch Fix's biggest selling point, right now, is that it's a company that can gain ground without people leaving the house. Right now—especially in the wake of resurgent lockdowns in various states—that's an attractive proposition. The fact that Stitch Fix's stock in trade isn't just clothing, but also data that will be valuable to other clothing makers, makes it even better and more resistant to economic downturn.

In fact, a recession should help Stitch Fix. If people spend less on clothing overall, they'll want to buy only that which best fits their circumstances. While that may drive people to less expensive clothing overall, the data derived from Stitch Fix's operations may make for the best possible clothing released. If you're going to buy just one shirt, after all, it should be the shirt that best fits you and your lifestyle overall. Stitch Fix thus not only makes itself more valuable to those who buy clothes from the company, but also to those who buy data from the company to make clothes that people want sufficiently to spend on, even during a recession.

Stitch Fix may sound like a clothing retailer with a useful gimmick, but that useful gimmick opens up a lot of possibility. Keeping an eye on this stock, and buying in, may not be a bad idea. Holding off just a little to let some of the dust settle around the company's pricing, however, may also not be a bad idea. Stitch Fix is a great one to keep an eye on, and consider buying in on later.