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Here's Why Stitch Fix Is Falling by Double Digits Again

By Brian Feroldi – Updated Sep 20, 2018 at 10:53AM

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Shares tumble for the second day in a row. Here's what investors need to know.

What happened

In response to receiving an analyst downgrade, shares of Stitch Fix (SFIX -7.01%) dropped 11% as of 10:30 a.m. EDT on Thursday. 

So what

Erinn Murphy, an analyst at Piper Jaffray, is the source of today's drop. While Murphy increased her near-term price target on the stock from $29 to $43, she simultaneously downgraded Stitch Fix's stock to "neutral" from "overweight."

Opening a Stitch Fix box.

Image source: Stitch Fix.

Murphy noted that she still likes the company's business model, but she believes that the stock's recent run isn't correctly pricing in the rising competitive threat from Amazon's (AMZN -1.90%) Prime Wardrobe or the potential of a "macroeconomic slowdown in consumer spending."

A portion of her concern comes from the fact that Amazon is now advertising Prime Wardrobe during NFL games and that the company is experimenting with a personalized recommendation service called Scout

Traders knocked down shares hard for the second day in a row in response to the downgrade. 

Now what

Amazon's Prime Wardrobe and new Scout service both could be serious long-term threats to Stitch Fix's core business. However, Prime Wardrobe has been available for more than a year, and it hasn't slowed down Stitch Fix's growth yet. Also, Scout doesn't even sell clothing yet, though that category is likely to be added down the road.

Stitch Fix is getting ready to report its fiscal fourth-quarter results on Oct. 1. Bulls and bears alike should tune in to get management's thoughts on the developing competitive situation.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Stitch Fix. The Motley Fool has a disclosure policy.

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