Here's Why Stitch Fix Investors Came Back Down to Earth

In this segment from MarketFoolery, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann sift through Stitch Fix's (SFIX 1.40%) closet to figure out what it was in the e-commerce apparel company's fiscal fourth-quarter results that sent its stock plunging 30%. Is it a good buy now that it's on the bargain rack? Sure, membership numbers missed estimates by a small margin, but the stock has been on a fast growth track. Now, though, it's back down to levels last seen this spring. Could it be an acquisition target? The pair talk about the future of the company, its customer demographics, and more.

A full transcript follows the video.

This video was recorded on Oct. 2, 2018.

Chris Hill: Stitch Fix's fourth quarter, you tell me how bad this was. In terms of the stock, the stock is, as of this moment, down 30%.

Bill Mann: That's kind of a lot.

Hill: [laughs] Was it really that bad? I know that part of this is guidance, part of this is saying, "Revenue in the future isn't necessarily going to be what we're all hoping for." You tell me. Is it all because of that? Is it because this is a stock that had done well, and this is some profit taking?

​Mann:​ I think that's mainly it. I almost feel like we're having 1999 discussions again. If you remember, in 1999, almost the worst thing that a company could do would be to turn profitable, because then you have something to measure. Stitch Fix was profitable this quarter. They came out with $0.18 in earnings per share, which is fine and great. I think it really had to do with, they were a little bit light on the number of members. They came in at 2.7 million, and the market was looking for 2.8.

This is an entirely new vertical. They're doing something that is rather extraordinary. I think that Katrina Lake is one of the most interesting, fascinating CEOs who's out there. The stock's done really, really well. 30% is quite painful, but it's not like GE, which has pulled back to 1985 levels. You're talking about levels that the stock traded at in May.

It stinks. I didn't think that the quarter was that bad. But for the stock to have done that well, I think that they needed a blowout, and they didn't deliver one.

Hill: This is a $3 billion company. This looks like a really nice acquisition target for some big retailer out there. It could be Amazon, it could be Walmart. As you said, Katrina Lake has done an amazing job growing this company, bringing it public the way that she did. Nothing but kudos to her to this point. But I look at the business of Stitch Fix. I'll just say that part of this is because I'm not the target demographic. I'm a middle-aged man.

Mann: Wait! By the way, everything I'm wearing today comes from Stitch Fix.

Hill: Does it really?!

Mann: Yes. This is a Stitch Fix outfit.

Hill: OK!

Mann: Not that I wear outfits. But, yes!

Hill: [laughs] We're not cutting that out. Producer Dan Boyd is not cutting that out.

Mann: But, you are the target! One of the reasons I'm a Stitch Fix client is that my wife not that long ago said, "Look, you dress like Ethan Hawke, and you can't pull it off. You need to do something." So, I decided to give it a shot.

Hill: Here's my question about the business. I look at Stitch Fix, and I think, I could see using that business. I can't see using that in the same way that I would use other businesses. It's not groceries. I could see using it occasionally. So, I'm curious if, from a business standpoint, the pathway to sustained growth for Stitch Fix, it almost seems like it has to be, "We have to get a lot more customers." Because I can't imagine, the customers that they have, who love the service, are going to be spending significant amounts of money year after year.

Mann: I think that's possibly true. One of the things that they talked about is that they do expect their revenue per customer to go down, even as they're expecting revenues to go up 20-25%. The way that I've used the service is, you can have it come as frequently or as infrequently as you want. I have it come once a quarter. You're not being inundated with clothes. It's not like the old Columbia House CD a month club, where those things are just coming, they're coming, and you have to figure out what to do with them.

Yeah, you actually are part of the target demographic. It's men more than women who are customers of Stitch Fix. Although, you are a much better dresser than I am, for sure.

Hill: That's debatable. In terms of the stock, Stitch Fix is down 30%. Buying opportunity? Or do you look at this and think, they have enough small question marks that I would want to wait three months and see what the next quarter brings?

Mann: No. There are no additional question marks that came out from their results today. I mean, they've probably hit the easiest part of their market. They're getting into Stitch Fix Kids, which I think will be a great segment, as someone whose kids grow out of their stuff seemingly every six weeks. There are no additional questions there. I think this is absolutely a wonderful buying opportunity for a business that is rather unique.