Investors are cautiously optimistic heading into Stitch Fix's (NASDAQ:SFIX) fiscal first-quarter earnings report. The subscription-based clothing retailer is beating the market so far in 2019, but its 35% increase is far from the over 90% gain that shareholders saw earlier in the year.

The slump since late June reflects concerns about slowing growth and potential cost spikes tied to the e-commerce upstart's expansion into new international markets. CEO Katrina Lake and her team have an opportunity to address those worries when they announce the company's earnings report on Monday and issue an update to their fiscal 2020 outlook. Let's look at the key metrics that investors will be watching in that announcement.

A woman takes delivery of an online order.

Image source: Getty Images.

Engagement gains

The surest way to silence the bears this week would be for Stitch Fix to show continued progress in attracting customers and keeping them highly engaged in the service. That success would show up in revenue growth, which is projected to be roughly 21%. Yes, that would mark a sharp slowdown from the prior quarter's 36% spike. But the company is still aiming to show continued growth both in its base of clients and in their average spending.

Other key metrics that reflect a strengthening market position include sales in new niches like accessories, new demographics like kids and menswear, and in new services like the recent "direct purchase" functionality. Some of Stitch Fix's many initiatives will have better returns than others, but the wide range of growth projects suggests the company could meaningfully expand its addressable market over time. An expanding audience of more-engaged users is a strong sign that management is progressing toward that ambitious goal.

Modest losses

A lower advertising outlay last quarter helped support surprisingly strong earnings in fiscal Q4. Yet investors aren't likely to see that happy financial trend extend into fiscal 2020. Management is planning to spend aggressively on the U.K rollout and on stock-based compensation so that adjusted earnings fall into negative territory in Q1 at losses of around $5 million.

But that's supposed to be a temporary drop into net losses due to the generally sluggish quarter executives are expecting. There will be no need for investors to panic after seeing red this week, especially if core profitability metrics like gross profit margin, inventory turnover, and cash flow remain strong.

Looking ahead

Lake and her team issued a full-year forecast in early October that raised a big question for investors given that Stitch Fix predicted a weak first quarter that will quickly give way to faster sales and profit gains over the proceeding nine months.

We'll find out on Monday whether that forecast was too optimistic when executives take the opportunity to change or affirm their outlook. As it stands, management is calling for sales gains to land at about 24% after adjusting for last year's extra sales week. Adjusted earnings should be roughly $20 million, or about half last year's haul as Stitch Fix continues prioritizing growth over short-term profits.

Lowering either of these targets (or both) would mean investors were right to be cautious after seeing the company's sluggish Q1 guidance. But even a miss there might create a buying opportunity for those eager to make a bet on a new apparel retailing model that's well suited for consumers' changing shopping preferences.

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