Stitch Fix NasdaqGS:SFIX Stock Report

Stitch Fix: No Rescue In Sight

Stitch Fix has lost more than 70% of its value this year as its business has eroded. Weakness in e-commerce, plus confusion in Stitch Fix's brand proposition, has led to the company's revenue declining y/y. Adding insult to injury, inflationary pressure is also dampening gross margins and widening Stitch Fix's losses. With limited liquidity, it's unclear how Stitch Fix plans to climb out of its current hole. The tech sector correction of 2022 has pretty much punished the entire group uniformly. While many stocks are now sitting below what I'd consider their intrinsic worth, some steep corrections this year were also perfectly in line with business erosion. Stitch Fix (SFIX) is an example of this. The clothing e-commerce company was once a popular fad, but in the waning days of the pandemic and the return of brick-and-mortar retail, Stitch Fix's popularity among consumers has declined dramatically. Year to date, shares have lost more than 70% of their value - which I think is in keeping with the performance of the business. Data by YCharts I remain quite bearish on Stitch Fix. I think the company is in a very precarious situation - and in particular, I'm concerned about the following factors: Is Stitch Fix relevant anymore, or is it just a passing fad? The idea of getting a "Fix" of five items and keeping only what you like was the whole selling point behind Stitch Fix in the first place. But declining active customers seem to be suggesting that people don't want this complexity in the shopping process. In fact, Stitch Fix introduced its direct-buy "Freestyle" program to mirror classic e-tailers: and in doing so, it lost its niche in the first place. Without much of a powerful brand to draw from, it's unclear how Stitch Fix plans to remain relevant. No clear moat. Stitch Fix's innovative buying method was part of its appeal versus the dozens of e-commerce clothing competitors out there. With the business doubling down on Freestyle, it's unclear what Stitch Fix plans to do to hold onto customer loyalty. Weighed down by inflationary pressures. Stitch Fix's gross margins are declining. At the same time, even though the company is letting go of a chunk of its staff, it is also facing corporate wage inflation. The net result is a deep gush of red ink, which is exactly what Wall Street does not want to see in this very cautious stock market. When it comes to consumer internet businesses, momentum is everything. Consumers catch onto what is "hot" at the moment, and rarely is there ever an opportunity for a company past its popularity point to suddenly become desirable again. It wouldn't be too far of a stretch to say that Stitch Fix may mirror some of the consumer internet failures of the dotcom era. Especially as more and more clothing brands themselves double down on their e-commerce chops, marketplace-style companies like Stitch Fix will be left competing against brands that have far better direct relationships with their customer bases. The bottom line here: resist the temptation to buy Stitch Fix on the dip. There is little value to salvage here. Unlike a struggling software business which at least would have some amount of recurring revenue, Stitch Fix makes for quite an unattractive "rescue acquisition" target - it's weighed down by inventory, it has a fickle customer base, and the nature of its business/its cost structure are much lower in margin. Continue to steer clear here to avoid further losses. Q3 download Stitch Fix's fiscal Q3 results, covering the quarter ending in April, were nothing short of a disaster. Let's go through some of the highlights here, starting with the top-line metrics: Stitch Fix revenue metrics (Stitch Fix Q3 earnings deck) Stitch Fix's revenue declined -8% y/y to $493 million in the quarter, missing Wall Street's expectations of $494 million. Note that this represents the first shift to a decline for Stitch Fix, which had grown at a 3% y/y pace in Q2. Adding insult to injury: this decline is only going to get worse. In Q4, the company is now forecasting a -13-15% y/y decline: Stitch Fix Q4 outlook (Stitch Fix Q3 earnings release) Active customers, too, are peeling off. Sequentially versus Q2, the company lost 112k active customers (which is defined as a person who made a purchase over the past year, which is a fairly loose metric), or roughly 3% of its overall base.