What happened

2018 was an up-and-down year for Stitch Fix (NASDAQ:SFIX) as the one-time market darling crashed over the last three months on two consecutive disappointing earnings reports. As a result, the stock finished the year down 34%, according to data from S&P Global Market Intelligence.  

As you can see from the chart below, the stock surged over the summer, doubling at one point on investor enthusiasm, before crashing on an underwhelming earnings report, and limping through another round of weak results in December to close the year.

SFIX Chart

SFIX data by YCharts.

So what

Stitch Fix had its IPO in November 2017 as a personalized styling service allowing customers to order boxes of clothes selected for them online. Though the company has plenty of direct competitors, including Nordstrom-owned Trunk Club, it has no real peers on the stock market, making it difficult for investors to value it.

A selection of clothes from Stitch Fix

Image source: Stitch Fix.

After the stock surged from its $15 debut in November 2017, it traded sideways over the first several months of 2018. The stock began to pick up steam after the company's third-quarter earnings report in June, jumping 26.5% on June 8. The company blew past analyst estimates in the report, and announced that it would launch Stitch Fix Kids, expanding the reach of its service. Momentum built from there as investors started to believe Stitch Fix could disrupt the broader apparel industry. 

With the help of analyst upgrades, the stock reached a peak of $51.77 on Sept. 17, but soon started to fall, first on a downgrade calling out the stock's valuation and then after its fourth-quarter earnings report showed slower user growth than expected.

Sequentially, active clients increased just 2% to 2.74 million in the quarter, missing estimates at 2.81 million. Though the summer months are a seasonally slow period for Stitch Fix, the market did not buy that excuse. In its follow-up earnings report in December, Stitch Fix again came up short in the user metric as active users increased 7% sequentially to 2.93 million, just shy of expectations at 2.95 million. The market responded to both reports with sharp sell-offs.

Now what

Stitch Fix stock has rebounded thus far in 2019 as it is up 20% through the first two weeks of the year, indicating that investors believe it was oversold. Still, user growth will remain a key figure for the market to watch as the stock remains priced for growth. And Stitch Fix can only grow sales by adding new customers or getting current customers to spend more -- and growing its customer base is a much better long-term strategy.

An expansion in the U.K. later this year, its first international venture, should help pad user numbers, but investors should hope that the company can gain considerably more than 3 million regular customers in the U.S. if the stock is to fulfill its promise.

Check out the latest Stitch Fix earnings call transcript.