Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Stitch Fix Soared After Its Earnings Report

By Danny Vena – Updated Apr 13, 2019 at 10:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The online personal styling service saw its stock soar in the wake of its earnings. What gives?

Expectations were muted going into Stitch Fix's (SFIX -0.42%) second-quarter earnings report. The company had provided two successive quarterly forecasts that weren't what Wall Street was expecting, sending shares plummeting after the company's fiscal fourth-quarter and first-quarter results. It turns out that investor fears about the company's growth weren't justified.

Investors cheered on Tuesday in the wake of Stitch Fix's better-than-expected fiscal second-quarter earnings release. The stock soared more than 25%, hitting its highest point since October. Here are three reasons investors are celebrating.

A young woman smiling while carrying a box with the Stitch Fix logo.

Image source: Stitch Fix.

1. The classic beat and raise

Investors like nothing more than results that not only exceed expectations, but cause the company to raise its full-year guidance. That's exactly what Stitch Fix delivered after two quarterly reports that left shareholders wanting more.

For the fiscal second quarter, Stitch Fix reported net revenue of $370.3 million, up 25% year over year, and the sixth consecutive quarter of at least 20% growth. This easily surpassed the high end of the company's forecasted revenue range of $360 million to $368 million, as well as analysts' consensus estimates of $364.8 million. Profitability was also better than anticipated. Adjusted net income of $12 million generated diluted earnings per share of $0.12, climbing past expectations of $0.05.

These robust results gave management the confidence to raise the company's full-year guidance. Stitch Fix is now forecasting net revenue in a range of $1.53 billion to $1.56 billion, up 26% year over year at the midpoint of its guidance -- up from the 23% growth the company forecast just last quarter. 

Check out the latest earnings call transcript for Stitch Fix.

2. User growth was robust

One of the biggest factors in the rout that occurred after Stitch Fix's fiscal first-quarter earnings were fears over slowing customer growth. The company had said that active user growth for the second quarter would be relatively flat sequentially, fanning the flames of concern that the company might have a user growth problem.

Stitch Fix put those fears to rest by reporting an active client count of 3 million to end the quarter, an increase of 453,000, up 18% year over year. This was actually 10% higher than the 2.9 million Stitch Fix reported last quarter -- and easily better than the company's calls for relatively flat sequential growth.

3. Short-sellers were sent scrambling

After two successive quarters of unsatisfactory results that sent the stock tumbling, a number of investors were betting that Stitch Fix would deliver a trifecta of disappointment. Short-sellers -- those who profit from a falling stock price -- had piled on Stitch Fix in recent months, betting the company would make it three-for-three. About one-third of the company's shares were sold short when Stitch Fix reported its earnings, setting up the stock price for a big move. 

Those shorting the stock borrow shares from their broker, hoping the price will fall. They hope to sell the borrowed shares back at lower prices, pocketing the difference. As a result, when the company reported better-than-expected results, short-sellers were forced to buy back the borrowed shares as the price was rising, and strong demand caused the stock price to climb even further, in a phenomenon known as a short squeeze.

Each of these factors helped propel Stitch Fix's shares higher in the wake of its earnings report, though it's still considerably lower than the highs reached last September. Stitch Fix only went public in September 2017, so it still has a relatively short track record, and with a market cap of just $3 billion, Stitch Fix will remain a volatile stock.

Danny Vena owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.