After two disappointing earnings reports in the second half of 2018, investor doubts were mounting about Stitch Fix (NASDAQ:SFIX), a one-time market darling. 

In a little more than three months, the stock had shed more than two thirds of its value due to worries about the company's user growth, which slowed significantly on a sequential basis and missed analysts' consensus estimates. The market seemed to fear that the online styling service would prove to be a fad. Those concerns were understandable, considering that it operates in an unproven industry, and its business model, in which customers rely on the company to choose clothes for them, is far different from the traditional way most people have shopped for clothes.

A Stitch Fix box leaning against a doorstep.

Image source: Stitch Fix.

However, Stitch Fix seemed to put some of those concerns behind it Monday with the report for its fiscal second quarter, which ended Jan. 26. The company beat its own guidance and topped Wall Street's earnings estimates. The headline numbers are below: 

  • Revenue increased 25.1% to $370.3 million, with growth accelerating from 23.9% in the first quarter. That beat the company's guidance range of $360 million to $368 million, as well as the analysts' consensus figure of $364.9 million.
  • Active clients grew 18.1% year over year to 2.96 million. That was the slowest pace of growth for that metric since the company went public. On a sequential basis, the figure was up just 1%, though its fiscal Q2 is a seasonally slower period for the company. By comparison, in fiscal Q1, the number of active clients grew 22.3%.  Management said that revenue per active client increased 6.1%, which reflected its success in engaging and reengaging clients, as well as higher client satisfaction.
  • Adjusted EBITDA increased from $18.2 million to $19.2 million, exceeding the company's own guidance range of $8 million to $12 million. Adjusted earnings per share increased from $0.07 to $0.12, which beat the analysts' consensus estimate of $0.05.
  • For fiscal Q3, management forecast revenue in the range of $388 million to $398 million, which would represent growth of 22% to 26%. That compares to analysts' average forecast of $384.4 million. Management also upped its full-year revenue guidance from the $1.49 billion to $1.53 billion range to a $1.53 billion to $1.56 billion range, and lifted adjusted EBITDA guidance from between $20 million and $40 million to between $33 million and $43 million.

Considering the company beat both its own guidance and analysts' expectations, and raised its guidance for the year, it's understandable that the stock moved 24% higher in after-hours trading. Beyond those key numbers, though, let's dig a little deeper to see where the critics' complaints about Stitch Fix stand now. 

Check out the latest earnings call transcript for Stitch Fix.

The revenue picture

Stitch Fix management has said on multiple occasions that growing its active client count is just one component of its strategy, and that overall revenue growth is the goal. In addition to adding new clients, the company is also focused on client retention, client satisfaction (measured in one way by the percentage of items customers keep from each "fix"), and order frequency, which the company is promoting through initiatives like Style Pass, which for $49 a year gives customers unlimited orders without the usual $20 styling fee. In other words, the company has multiple revenue growth drivers beyond adding new clients, though expanding its customer base is still key to its long-term success. 

Based on the recent trend, active user growth could continue to moderate, but other drivers look like they're set to pick up the slack, especially as the company delivered solid revenue-per-client growth. For Stitch Fix, building successful customer relationships is still more important than growing its active client base. Meanwhile, expansion opportunities like its upcoming launch in the U.K. in its fiscal Q4 should help expand its total addressable market, and therefore, its active client base.

Beyond revenue growth, Stitch Fix is also delivering steady profitability, and has generated free cash flow of $45.8 million through the first six months of its fiscal year.

While concerns still remain about the company's long-term potential, Stitch Fix benefited from lowered expectations this time around as nearly a third of the stock had been sold short coming into the Q2 report.

The stock price is likely to remain volatile as the market assesses the company's long-term prospects, but after beating its own guidance and analysts' estimates, and raising its guidance, Stitch Fix has handily passed its latest test.