In this episode of MarketFoolery, host Mac Greer chats with analysts Emily Flippen and Andy Cross about some of the biggest business news. Stitch Fix (NASDAQ:SFIX) stock is down about 10% following its quarterly report. The trio discuss the bear and bull cases for this company's long-term potential.
Meanwhile, the U.S. trade wars may be spreading beyond China and into the European Union amid some disputes about airplane makers. And, Facebook's (NASDAQ:FB) Libra initiative may or may not be encountering some more trouble, and that may or may not matter for the long-term success of the contentious cryptocurrency. Tune in to find out more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 2, 2019.
Mac Greer: It's Wednesday, October 2nd. Welcome to MarketFoolery. I'm Mac Greer and I am joined in studio by Motley Fool analysts Andy Cross and Emily Flippen. I got the gang back together again. How we doing on Wednesday?
Andy Cross: Hey, Mac!
Emily Flippen: Better than yesterday, actually.
Greer: I'm pinch-hitting for Chris. Chris is resting his voice. Rest assured, Chris Hill will be back in the saddle soon. We're giving him some much-needed rest. On today's show, we are going to talk about a new twist in the trade wars, and we're going to talk some Facebook and crypto. Things are getting interesting.
But we begin with Stitch Fix. A rough day for Stitch Fix. Down more than 10% on earnings. Lower than expected forecast for the current quarter. For those of you who do not follow Stitch Fix, Stitch Fix is in the business of delivering curated boxes of fashion items for customers. They try them on, they buy what they like, they send back the rest. Andy and Emily, what do we think of Stitch Fix? I should add that it is a Motley Fool rec.
Flippen: Yeah, it's a recommendation in a lot of services, actually. They had a pretty good increase in active clients. 18% year over year. That brings them to 3.2 million. A 36% increase in revenue. Earnings were much higher than expected. But it seems like people didn't like the guidance projections for next quarter. The company said they spent less on advertising over the last quarter, so moving forward, the growth is going to be a little bit slow next quarter. But then, they projected for higher revenue growth in the quarters after next quarter.
What I thought was really interesting -- admittedly, I'm a pretty out-and-proud Stitch Fix bear here -- what they're pointing to in later quarters is this increased revenue growth which they associated with an increase in sales from their direct buy program. It's really interesting because in my opinion, the value proposition of Stitch Fix was, they're supposed to tell you what you like, and then they send it to you, and you buy it, right? The difference is, now they're relying on customers going to the platform -- active customers, people who've already subscribed -- and making one-off purchases of stuff that they like on their platform. It'll be interesting to see if that actually causes this revenue surge like they expect it will.
Cross: Yeah, instead of waiting for your box to come, you can just buy from your list, directly on the site. Some interesting numbers. 18% active client growth. Emily mentioned, up to 3.2 million. That was actually up from last quarter. I said recently, I think last week on Motley Fool Money, that I was looking for that to bounce back up. It's trended down for the last few quarters, and hit 16.6% growth last quarter. So, I was glad to see that back up above 18%. The revenue numbers are very attractive now. They did have an extra week in there this quarter. If you balance that all out, growth was still up in the high 20% range. A little bit of weaker guidance. Some interesting commentary about how the summer season's lasting a little bit longer, and the profit margin on those -- they call them "fixes," like, when you get a box, you get a fix. The clothing in the fixes that are more summer season aren't quite as high from the profit margin standpoint.
Greer: Who knew? The president and CEO says summer goods have a lower average selling price.
Cross: Think about it -- you're not buying a sweater, you're not buying a big jacket, you're buying a tank top or shirt --
Greer: Costco in the summer, Costco in the fall, the prices are pretty much the same.
Cross: Not for a shirt versus a jacket. So, you can see how that plays out. As Emily mentioned, the growth forecast, a little bit changed on their advertising practices. A little bit lower gross margin as they're thinking about their inventory management. The thing I like about Stitch Fix is, they're so efficient when it comes to managing the inventory. Far more efficient than typical retailers, as you would expect for an online platform. Lots of data scientists. They continue to invest. The profit picture is shifting a little bit, and the margin picture is not as attractive as it used to be. Still, the stock is below 1X revenue. They're profitable. They're generating healthy free cash flow. The short ratio -- people betting against the stock -- has actually increased pretty dramatically over the last few months. There definitely is a healthy market of skepticism out there that they can compete long-term against the likes of Amazon. But I like the founding story. I like the market they're playing in. It's a $400 billion plus market. Online penetration will continue to grow. I think we will continue to buy clothing this way over the future. The long-term picture, I still think Stitch Fix has an advantage being a first mover here.
Greer: Emily, you mentioned that you were a bear. I'm not going to let you just get away with that.
Flippen: [laughs] Good! I don't want to!
Greer: I hear Andy, and it seems like there are a lot of reasons to like the company. Why are you bearish?
Flippen: Let's go back to what Andy said. He said they're playing in a $400 billion market. That's like saying Blue Apron is playing in the entire food market. When push comes to shove, everybody who's eating food is not doing it over Blue Apron. Everybody who's wearing clothes is not going to be doing it over Stitch Fix. Ultimately, Stitch Fix is a luxury. It's an expensive way to get clothes that anecdotally have been referred to as very cheap feeling clothes. It's a luxury. People who are paying extra money for their Stitch Fix clothes, not just the clothes themselves but $20 every time they get a box, it's not going to be the majority of the population. It's not going to be that entire $400 billion market. I'll even go to say that if you are one of the investors that believe we're entering some sort of recession -- that's not to say that I think we are -- this is the first thing that gets cut from people's budgets. To me, it's not to say there aren't loyal customers out there. Their numbers prove it. They get increasing customers. They get increasing sales per customer. It's very clear that people who use their platform and stick with it love it. But I don't think that's going to be a majority of the population by any means. And I don't think this is revolutionizing the way we buy clothes.
Cross: Well, they don't need to get all $400 billion in the market. Of course not. Just the fact that clothes continue to be an investment that people make, and as we move more into online purchases -- some of the points Emily makes are definitely valid. This tends to be a little bit more a luxury. It tends to be a new experience. Not everyone does it, although more and more people are doing it. By 18% client growth, that represents that they are seeing continued penetration. The online penetration from the entire clothing market will continue to increase. And I think Stitch Fix has some advantages as they move into men, which are a small fraction of their audience; even kids. They're almost all in the U.S., a little bit in UK. They still have a global audience to go through. They've proven they have a profitable model to be able to build upon. They're going to make those investments. When I just look at that perspective, where the stock price is today, long-term opportunity to be profitable, to make money, and this stock, I think it's pretty decent.
Greer: This will probably shock both of you -- I am not a Stitch Fix user.
Greer: I know, I know.
Greer: I'm probably not the target market. As I mentioned earlier, I tend to do a fair amount of my apparel shopping at Costco. I don't know if you can call it apparel, but I buy the stuff they have at Costco. But I want to bring Dan Boyd in, our producer, because I know that Dan is a Stitch Fix user. And I think, Dan, a satisfied Stitch Fix user?
Dan Boyd: Oh, absolutely. Mac. I am a huge fan of Stitch Fix.
Greer: Sell me on Stitch Fix. Right now, I've got my go-to, and my wife hasn't left me. That's pretty much a win.
Boyd: You've got your go-to. You've got your traditional means of clothing yourself. Let me appeal to what I think might be one of your strongest qualities -- your laziness.
Greer: OK, good.
Boyd: That's a joke, listeners. Mac works very, very hard. But, the great thing about Stitch Fix for me is, I just hate clothing shopping. I despise it. I don't want to spend a couple hours out in stores, dealing with trying things on, going into changing rooms, wasting what I would consider valuable time on that.
Greer: But does it really solve a problem there? I have visions of getting all these clothes I don't want, and then I have to send them back. It feels a bit like a headache. I know it's a different business model, but for me, it feels a bit like Blue Apron.
Boyd: They you a bag to send things back in. You don't have to do any work. All you have to do is put it in the bag, close the bag up. You drive to work, right?
Boyd: Just throw the bag in the car, drop it off in the mailbox here at work on your way in in the morning.
Greer: Will the clothes make me look better?
Boyd: I mean, Costco clothes ... I don't want to cast any aspersions here on the --
Cross: They can't not.
Boyd: Fantastic McCormick jeans that I've seen you rocking around the office.
Greer: One size fits all!
Boyd: My wife likes the way the clothes look on me, and she likes, every month, the little fashion show that she gets to help me work through.
Cross: [laughs] Oh, I like it!
Boyd: It's not just a thing for me, but it's also a nice little couple's activity for me and my wife.
Greer: OK, it sounds like it could be a good fit. Let's move on to the World Trade Organization, the WTO. How's that for a segue? Backing a U.S. request to impose tariffs on $7.5 billion dollars of European goods. Emily, I want you to sort this out for us. This is a long-standing dispute. Goes back to like 2004. It involves Airbus and Boeing and unfair practices. And now, the U.S. is going to impose almost $8 billion -- at least, they have the right to impose it.
Flippen: Anytime we're not talking about the China trade war in the context of trade, I'm a happy camper, but I am a little bummed that today, it seems like the trade war might be expanding its horizons a little bit. Essentially, to walk you through what happened -- like you mentioned, this goes back to 2004. The U.S. has made official complaints against the European Union to the World Trade Organization against illegal subsidies that they were giving the European airplane maker Airbus. That is to say that the EU then responded by saying to the World Trade Organization, "Wait a minute, they do the same thing for Boeing." And it's true. We all give subsidies, in one form or another. The European Union was giving them, apparently, lower interest rates. The U.S. was giving Boeing undeserved tax breaks. We're all trying to support our domestic industries. But it is very much against the premise of the World Trade Organization. The World Trade Organization came out essentially backing the U.S. request to recoup those losses that they believe that the economy sustained thanks to the subsidies for Airbus, to the tune of nearly $8 billion of European goods. The EU, if the U.S. chooses to, I guess, use that right that the World Trade Organization has granted them, will likely respond to their own wave of tariffs, which will bring us into a trade war 2.0.
Cross: That doesn't sound good.
Greer: That does not sound good. Is there a takeaway for investors here? Are there stocks that could benefit or stocks that could get disproportionately hurt?
Flippen: It's more of a testament to the oligopoly that exists right now between Boeing and Airbus. Both these companies compete strongly with each other for what is a growing and lucrative market. More than anything, we're seeing a lot of these companies being used as a political tool in a lot of ways. Personally, as an investor, I don't like to see stuff like this. But I don't think it would change my investment strategy. I'm not looking to suddenly short Airbus or Boeing. I'm not looking to limit my exposure to the European Union. All of these things will come and go with good time.
Cross: Ironically, I heard an Airbus advertisement on the radio today coming in to work.
Flippen: It's like they knew it was coming!
Cross: It's interesting -- in the D.C. area, where we're located, you get a lot of interesting advertisements because the government is such a big employer here in such a big space. You do have a lot of government contracting firms advertising on the radio. I don't ever remember hearing an Airbus one before, and I heard that today.
Greer: Let's move on and talk some Facebook and crypto. Some of Facebook's partners may be getting cold feet when it comes to Facebook's cryptocurrency, Libra. Visa, MasterCard, and other financial partners that signed on to help build and maintain the labor payments network are reportedly reconsidering their involvement. Now, I should add that Facebook executive David Marcus said that there was no angst internally over Libra's progression. What do we think?
Flippen: [laughs] Facebook doesn't have angst over it? They didn't have angst over a lot of other things that ended up being big problems, so I think that's quote is hilarious.
Cross: We talked about this when the announcement first came out -- we all were like, "Listen, this is so early on." In fact, Emily, you and I were talking about. It's so early on, there'll be so many changes, many challenges, lots of concerns, how they position it, how they talk about it. Clearly, here you go, you have some very key partners, very important companies in this payments space and financial and digital currency space, that they're now starting to say, "Wait a second, maybe this is a little bit different than what we originally envisioned." It's just natural that you're going to have these struggles.
I don't know ultimately how this ends up for Facebook and for Libra, whether it totally kills it or it's a bump in the road. But it's not surprising that these companies that have been around for years and are extremely well represented in this space are starting to have some questions about if Libra is the way they want to go.
Flippen: I love getting pulled onto this podcast because it really gives me the opportunity to tap on the knowledge of everybody else. Again, today, like yesterday, reaching out to Jason for McCormick, I reached out to our in-house cryptocurrency expert Aaron Bush for his comments about this new story. I agree with a lot of his analysis, actually, which is to say that Facebook was trying to be proactive when they went after a cryptocurrency that worked with regulators, but that's a moving target. It actually offers a lot more challenges. Apparently, these four companies -- which includes Visa, MasterCard, PayPal and Stripe, as rumored -- have issues with the fact that they believe Facebook oversold them on the involvement of regulators.
No surprise there. And, actually, about the idea of cryptocurrencies working with regulators at all. Inherently, there's an idea that cryptocurrencies could undercut monetary policy. A lot of European countries have already come out and said, "Hey, we don't actually think that Libra, or any cryptocurrency, trying to become a stable coin," which Aaron tells me is a cryptocurrency that is stable, so, it's backed by real currency -- any development of that actually inherently threatens the economic policies of the countries in which it is available. I thought that was a really interesting argument.
I don't think that this will long-term derail Libra. They're not even planning on launching until June 2020. They had a backlist of hundreds of companies that were willing to jump into place of other companies that might pull out. So, maybe companies that are a little less worrisome about the European market and regulators might be willing to put up the $10 million that they're asking to get Libra off the ground.
Cross: I'll buy Mac's first Stitch Fix fix if they're able to get this thing off the ground by 2020.
Greer: Wow! I love that!
Flippen: June 2020?
Cross: June 2020. This is just going to be a really long struggle, to get this thing to a point where they're ready to go. I empathize with Facebook -- they were in an almost no-win situation. They couldn't do this privately behind the scenes, so they had to come out and make an announcement of it. Then you saw all of the regulatory challenges to it. You saw a lot of governments raise concerns, and different groups of different organizations inside the governments. Now, you're seeing some companies starting to push back a little bit. I agree with Emily -- I think eventually, this will move in this direction. But just I think 2020 is a very early timeframe for it. Mac, your first Stitch Fix fix will be on me if they launch it in 2020.
Greer: I like it. Emily, you mentioned Aaron earlier. I caught part of your conversation. I may butcher this quote, but I asked Aaron what he thought, and I think this was the quote. He said, "Scale is Facebook's superpower; brand is Facebook's kryptonite." Is that correct?
Flippen: Yeah, I think that's right. But he said it in such a wise, knowing way that we can't quite replicate here. But, that's a really good point. Facebook, to the extent that it has regulatory issues, has it because of poor judgment that they made in the past. The idea of working with regulators now -- it's one thing to say that; it's another thing to do it, to walk the walk. Facebook has a history of not walking the walk.
That being said, I actually feel like they're progressing a lot quicker than people expected them to with Libra. They're saying that the actual structure of it, the technology, they already have up and running. They're sending mock payments within itself. That happened months before people expected. So, Mac, if there's some bet about a Stitch Fix box --
Cross: Take it.
Flippen: Yeah, I'd take it. I think it'll probably happen.
Greer: OK, I'll take it. So, status update for Libra in a word would be what?
Flippen: "Wait." That's their status update. It's a wait-and-see thing. I think making a judgement right now based purely off of a rumor that four companies may be pulling out is too soon. That's not to say that there's anything behind Libra. Facebook obviously has its own host of issues. ... This is turning into a very long status update. Long story short: wait.
Greer: OK. The desert island question. It's an easy one today. It's a binary choice. Two stocks. You have to hold one over the next five years. You've got Stitch Fix, or you have Facebook.
Cross: I own Facebook. I don't own Stitch Fix. I would buy Stitch Fix and hold it for the next five years.
Flippen: I'm not touching Stitch Fix with a 10-foot pole, so I'm buying myself some Facebook.
Greer: OK, there you have it. As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Emily and Andy, thanks for joining me! That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we will see you tomorrow!