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Why Stitch Fix Stock Surged 19% in October

By John Ballard - Nov 7, 2019 at 4:32PM

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Investors liked the improvement in active client growth last quarter.

What happened

Shares of Stitch Fix ( SFIX -5.50% ) gained 18.8% in value last month, according to data provided by S&P Global Market Intelligence. The stock has been volatile over the last year, but the company's fiscal fourth-quarter earnings report at the beginning of October gave investors something to cheer about.

Most importantly, the earnings results showed stabilization in active client growth, which had been decelerating earlier in the year. Overall, revenue met analysts' expectations, climbing 36% year over year to $432.1 million. Earnings per share of $0.07 in the quarter beat analysts' estimates by $0.03.

A woman opening a box of clothes from Stitch Fix

Image source: Stitch Fix.

So what

The stock price initially dropped on the earnings report, but then investors changed their minds and sent the stock sharply higher for the month. It was encouraging to see the number of active clients grow 18% year over year to reach 3.2 million. That was a slight acceleration in growth over the previous quarter.

Additionally, Stitch Fix continues to get smarter at recommending items to clients. The success rate, which measures the percentage of the time a given item is purchased by the client, has steadily improved over the last year. This contributed to increasing revenue per client in every quarter of fiscal 2019.

Now what

For fiscal 2020, management is calling for revenue to grow between 20.5% and 22.5% year over year. EBITDA (earnings before interest, taxes, depreciation, and amortization) is expected to be between $10 million and $30 million, for a margin of 0.5% to 1.6%. The outlook reflects the impact of announced tariffs, expected to go into effect on Dec. 15.

Regardless of what happens in the near term with tariffs, Stitch Fix has a tailwind at its back, as CEO Katrina Lake explained during the earnings conference call: "This company was founded with the premise that personalization is the best way to help clients navigate the crowded world of apparel retail. This was our belief in 2011, and we have even deeper conviction today that personalization is the future."

Lake also suggested that the business has a very long runway of growth ahead: "We've been in this business of personalization for almost a decade, and we believe that our investments in these capabilities is precisely what sets us up to be successful for many decades to come."

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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