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Stitch Fix Sews Up a Strong Quarter

By Jason Hall - Updated Apr 12, 2019 at 8:36PM

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The stylish apparel subscription service beat its own best sales estimates and reached 3 million active clients during its most-recent quarter.

It's been a very up-and-down ride for Stitch Fix ( SFIX 0.96% ) stock since its IPO in late 2017. While shares are up 128% from the IPO as of this writing, they're still down around 33% from the all-time high, reached last October. That's even after a huge run-up to start 2019, and then today's (March 12) giant 28% pop following the release of its second-fiscal-quarter 2019 results before market open. Since the calendar turned to 2019, shareholders have seen Stitch Fix's shares more than double.

Let's take a closer look at the second-quarter earnings release and management's comments on the earnings call. Stitch Fix's results not only exceeded Wall Street analysts' expectations but beat management's own guidance as well.

Woman browsing Stitch Fix website on laptop.

Image source: Stitch Fix.

Here's how Stitch Fix delivered market-beating results

The personal styling service delivered strong sales growth in the quarter, with $370.3 million in revenue, up 25% from last year. Not only was this better than the approximately $365 million analysts who cover the company were looking for, but it also came in ahead of management's own guidance of between $360 million and $368 million it set in the first quarter.

Stitch Fix also continued to grow the number of active users -- called active clients -- subscribed to its service. This important metric increased 18% to 3 million at quarter-end. Not only did the number of active clients increase, but the amount of money they spent also went up. On average, active clients spent $463, 6.1% higher year over year.

The result of more clients spending more money -- along with what management described as better inventory management, resulting in fewer items being sold at clearance discounts -- helped Stitch Fix improve its profitability, too. Gross margins moved 110 basis points higher to 44.1%, and adjusted EBITDA -- earnings before interest, taxes, depreciation, and amortization -- was $19.2 million, well above management's guidance last quarter.

Even as the company continues to aggressively increase its operating expenses to support and drive growth, it delivered $12 million in net income in the quarter, worth about $0.12 per share. That metric was also well ahead of analyst estimates, which called for about $0.05 per share on average.

Check out the latest earnings call transcript for Stitch Fix.

Here's what management is investing in for growth

Sales, general, and administrative expenses, or SG&A, increased 32.2% to $147.7 million. As a percentage of sales, this measure came in at 39.9%, up from 37.8% of sales year over year, though it was down from 42.1% of sales in the first quarter. It's worth noting that SG&A expense increased sharply year over year in the first two quarters of the fiscal year, even after management decided to shift some of its marketing spending out of the first half and into the upcoming third and fourth quarters.

On the earnings call, management indicated that part of this was a reprioritization of how it was marketing, as well as its recently launched integrated brand marketing campaign. Here's how founder and CEO Katrina Lake described it on the earnings call:

Historically, our marketing efforts have largely been focused on a more utilitarian approach of describing how our service works. This has been a great demand-generating strategy, but we see a lot of potential in adding brand as another marketing channel to diversify our mix and reinforce why our brand matters. Few companies have as deep a connection with their clients as we do.

In addition to marketing spending, Stitch Fix continues to spend on both people and technology to deliver the best personalized service it can. CFO Mike Smith spoke about the company's investments in a new algorithm to help it optimize inventory in a better way:

Our new algorithm considers the preferences of a broader universe of clients in the queue to determine which inventory should be made available to stylists as they style for each client. In doing so, it ensures our stylists have the right inventory to meet each client's style preferences regardless of the client's position in our styling queue.

Lake also addressed the company's efforts to enter the U.K. market, stressing the value of the personal stylists, which are a key differentiator for Stitch Fix versus typical online shopping competitors:

...a lot of what we do with Stitch Fix is leverageable, where I think people (in the U.K.) are really excited to have the idea of a personal stylist. People are very comfortable shopping online for apparel, even more so actually than in the U.S. and that people -- there really aren't other offerings out there that offer the same level of personalization and really kind of this deep understanding. And I think that that is also a huge benefit that people would love out of our business.

Looking ahead

Coming out of a successful second quarter that exceeded even management's expectations, Stitch Fix raised full-year guidance. Management now expects sales between $1.53 billion and $1.56 billion, up from the $1.49 billion to $1.53 billion it set last quarter. The combination of inventory management efforts along with sales leverage from increased per-client spending is expected to improve the bottom-line result, too. Guidance for adjusted EBITDA was raised to $33 million to $43 million, up from $20 million to $40 million.

It's also reasonable to expect management to continue prioritizing building a bigger business over squeezing every dollar of profit it can out of clients; a big ingredient is its personal touch, and steady investment in hiring and retaining the best style talent it can is critical to Stitch Fix's success.

Whatever happens in upcoming quarters, Stitch Fix stock is likely to remain very volatile, as everything from macroeconomic concerns over consumer spending to rumors of new competition stirs investors up. But if Lake and her team continue to execute on their strategy and keep active clients engaged and spending, the future remains very, very bright for this e-commerce fashion leader.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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