Stitch Fix (SFIX) Earnings Thoughts

Stitch Fix reported earnings December 7, 2021 and the stock had an awful reaction trading lower by over 20%. I'll dive into why the market sold the stock off as well as where I think the stock may be headed from here.

Earnings for the quarter weren't all that bad for Stitch Fix. The company showed growth of 19% from the same period last year and their revenue per active client was over $500 for the second quarter in a row. Where the company really disappointed was in their guidance for next quarter anticipating revenue between $505 million and $520 million. If that is the case, that would be 0%-3% revenue growth from the prior year. That just won't cut it for a growth company expected to grow sales by 20% each quarter.

What's more unnerving is the fact that management is "experimenting" with different ways to get growth back on track. They indicate that most of the investments being made are for the long haul but experimentation makes me a little uneasy as an investor. In order to feel comfortable with that kind of language I think you need to have the upmost confidence in the leadership team - and I'm not fully there.

Fundamentally, I think investors were way too optimistic about this name - myself included. It was nonsense for SFIX to trade at 5x sales and be considered a "tech" play. They are an online clothing supplier and they continually try to dress it up more than it is. Don't get me wrong, I like the service (don't love), the clothes are good quality and fit amazing (but a little pricey), and I think they have room to grow and improve. But it was foolish of me to ever look at this company as anything more than a clothing supplier. We knew growth would level off eventually - and it has. I just hope it is a temporary blip and not a continued theme.

Stitch Fix also saw an added boost from the pandemic, that I hope they can hold on to, but if there is any softness to the economy I think they'll struggle mightily. If I were financially pressured this is definitely one of the first services I'm cutting.

Now on to valuation and what to do with the stock. At the height of the pandemic the stock traded for 5x sales - now it is trading closer to 1x sales. And that's not a problem for me. In fact, investors probably got way ahead of themselves. American Eagle, Gap, and others trade for about 1x sales. Granted, they aren't growing like SFIX is but if SFIX is going to grow at 3% a year then they deserve to trade at a similar valuation to them.

I initially bought the stock in the low $20's at the start of the pandemic. I rode it all the way up to $100 where I barely took anything off the table. I had some options for myself that I sold near $100 that ended up being an amazing trade but aside from that I think I only peeled off a few shares for a few clients in the $90's. So in essence, I'm back where I started - so what do I do now?

I need some more time to mull it over but I'm inclined to hold. Because of the risky nature of the stock it is a small position in my portfolio and it's been easy for me to hold it during the entire period up and down. I do think the stock can trade to around $40, especially if they get back on track and the investments management make pan out. I wouldn't call SFIX cheap here but it definitely is no longer expensive so I'm inclined to hold my small position.