In this episode of MarketFoolery, Chris Hill talks with analyst Abi Malin about some recent business news. Stitch Fix (NASDAQ:SFIX) shares popped about 10% after earnings, but the real story is in Stitch Fix's increasingly solid market niche, along with its clearly successful tech and data implementations. Leadership at Upwork (NASDAQ:UPWK) is abruptly changing hands, and while the company seems excited about the new CEO, there's a lot that investors still don't know. Chewy's (NYSE:CHWY) quarterly loss was a bit larger than expected, but there's a lot to like about the online pet store's strategy going forward. Tune in to hear more.
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This video was recorded on Dec. 10, 2019.
Chris Hill: It's Tuesday, December 10th. Welcome to MarketFoolery. Thanks for listening. I'm Chris Hill. Joining me in studio, the one and only Abi Malin. Thanks for being here!
Abi Malin: Thanks for having me!
Hill: We've got some earnings. We've got another CEO on the move. We're going to start with Stitch Fix, which was expected to post a loss in the first quarter. Instead, the online clothing styling service broke even. I guess that was good enough, because Stitch Fix shares are up about 10%.
Malin: Yeah, people are really excited. I think that breakeven point is always sort of an inflection point for companies. Anytime you hit it earlier than expected, it's obviously going to be positive. But, there was a lot to be excited about in this quarter, I think.
Hill: What in particular did you see? Because this is not a company where you have a particularly flamboyant CEO coming out, making pronouncements about profitability from now until the end of time.
Malin: No, definitely not. But, when you look at their key metrics -- active client count was about 3.4 million, which was up 17% year over year. Net revenue increased 21% year over year in the quarter. Just comparing those two metrics, new clients are continuing to spend at an increasing pace, which is good. You mentioned the breakeven point. They also have gained traction with a couple of different initiatives. The first was that they've now started selling clothing on the website and through the mobile app independent of what comes in the Fix. When they first came public, this was an unmentionable thing. I think people asked about it, but they were not really interested in it, didn't want to talk about it. We've seen them move directionally this way, with adding extras and things like that. But now, they have what's called a Shop Your Looks option. This was rolled out to about a third of U.S. women's clients, and they plan to roll it out to the rest of U.S. women by the end of fiscal year 2020. It's still a curated selection of about 30 to 40 items, but Stitch Fix believes that this allows them to capture another part of wallet share that they haven't been able to get at. Their example that they gave was that shoes, handbags, and accessories are only 10% of a typical Fix revenue, but about 20% of the Shop Your Looks. So, that was positive.
They've also introduced a Shop New Colors option for all adult U.S. This is things that clients have previously bought that they can buy in new colors, new prints, new sizes, etc. A lot of positive traction in terms of initiatives going forward.
Hill: I have to say, the 17% growth year over year is pretty impressive when you consider that as Stitch Fix continues to grow, like any business, once you're growing off a bigger customer base, then, obviously, that type of growth becomes more meaningful. What do you think of the stock itself? Just in this calendar year, and in the time that Stitch Fix has been public, this has been a stock that has visited --
Malin: Multiple spots.
Hill: -- multiple spots. Certainly, if you got in early on Stitch Fix, you're up nicely. And, at various points, depending on when you bought it, you may also be up. But, do you look at it right now as a reasonably priced stock?
Malin: Fair question. I think when they first came public, it was right as Blue Apron was exploding. There was a lot of pessimism about, generally, box subscription companies. I think the market has always had a hard time classifying Stitch Fix. They think of themselves as a technology company operating within the retail space. The market originally thought of them as a retail company, and they got slammed for that, I would say, right as they came public. And then, there was this reckoning, and they became this technology company. They have a very prominent CEO, Katrina Lake. I think they got, maybe, ahead of themselves in a valuation perspective. The numbers had run up. There's a lot of expectations. I think, estimating the total addressable market, how many people are actually going to use this, has always been an issue for this company. Analysts just really haven't pinned down exactly who they're targeting here.
But, again, the 17% year over year -- you're right -- on a bigger base, that's amazing. It's not necessarily something that I can say for sure that I have a more accurate projection than anyone else on, but I remain interested. I think at this price, it's a stock to watch, for sure.
Hill: It's interesting, because we talk from time to time about Wall Street analysts, and certainly, we have analysts here in the building -- you being one of them. But, you touched on something that I think is one of those things that is easy for everyday investors to dismiss, but it actually ends up being slightly more important than it's given credit for, and that is, what is the story a business is trying to tell about itself? And you're absolutely right that Stitch Fix, unfortunately for them, they got caught up in the timing of Blue Apron. You mentioned the word subscription, which is a word they have always bristled against. I think one time, an article was published on fool.com where the sub-headline included the word subscription, and we immediately got an email from one of their PR people that was like, "We're not a subscription service." But, to your point, they're trying to do something different. And all credit to them for doing that. And one of the challenges that comes with that is, it makes it a little bit harder to explain who you are and what you're actually doing -- and, as you pointed out, what the addressable market is.
Malin: Right. From that perspective, it's interesting, too, because when they first came public, people were like, "This is never going to work. People don't want these quote-unquote subscriptions," even though they bucked that trend. But, "People don't want these boxes." And I think the tide has almost shifted to the entire opposite end of the spectrum, which is that people do want this, and there's so many competitors, and why will it be you? Especially with Amazon's entrance into this market, I think you've just seen them struggle with pretty much every competitive force out there.
I think it's an interesting company to follow. I think Katrina Lake is a really inspiring leader, and I think the story remains to be in an early inning.
Hill: Shares of Upwork are down 5% this morning on the news that CEO Stephane Kasriel is leaving. Upwork, for those unfamiliar, is a global freelancing platform. We use Upwork here with Motley Fool. A little surprising, I guess, that the stock is down on his departure. I say that not necessarily because this is a stock that's been on fire over the last couple of years, because it hasn't been. But, this seems a little out of the blue. The chief marketing and product officer is going to be the new CEO. Kasriel will stay on as an advisor. Not a lot of details on this, so part of me wonders if Kasriel is leaving of his own accord or if he got a nudge.
Malin: Definitely a fair question to ask. I mean, he's only 44 years old. That means there could very well be something else in the pipeline. The market never likes things that are unexpected. Departures are obviously one of them, especially at such a growth stage company. You're really looking for a leader who's going to transform and continue to guide that business through, so this sort of lurch is never going to be received positively.
With that being said, Hayden Brown, who is their current CMO and product officer is stepping in. I think another thing to mention is, he's actually stepping down at the end of 2019. She's starting January 1st, 2020, which is really quick for the news to just now be hitting the markets.
I think something positive is, she's actually been at Upwork since March 2014. She was originally the senior director of marketplace at its inception. She's not a founder, but she's been there from a very early stage at this company. She also owns about $3.4 million in stock, which is actually more than Stephane Kasriel owns. He owns about $2.5 million of stock. It's not a huge investment, but it doesn't count for nothing.
I think it's an interesting story. I don't think we've heard that end of it.
Hill: Yeah, it definitely seems like one of those stories where we're going to get more details over the next couple of months. Definitely an opportunity for the new CEO, starting the year fresh. Although, I do agree with you, it is a pretty quick turnaround, particularly coming at this time of the year with the holidays. But, if Upwork can put up a couple of good quarters at the beginning of 2020, then she's off to the races.
Malin: Definitely. From my perspective, not that I'm internal in their company, but just in terms of how titles normally work, this isn't the first person that I would expect to assume this role. And she was supposedly voted in there unanimously, and very excitedly. It's definitely an interesting choice, and one that probably will be scrutinized for a while.
Hill: Chewy sells pet products online. Chewy's third quarter loss was bigger than Wall Street was expecting, but revenue looked pretty good, and they also raised guidance on top of it. Shares of Chewy are up a little bit.
Malin: This is another one, also wrapped up in a lot of the negative pessimism that got to Stitch Fix as well. It doesn't necessarily have to be a subscription service, but about 70% of their customers are on an auto-ship schedule. Their net sales were up 40% year over year. Their gross margin was up about 410 basis points, which is massive progress for a year. A lot of that is due from investments in private brands. Their assortment of private brands is up 80% year over year, and sales from private brands are up 60% year over year, so, more than 1.5X the overall growth for this company. And then, they've also started building out investments into Chewy Pharmacy, which I think is a great pillar for them for growth. A lot of positive here, but that loss was wider than expected.
Hill: The pet pharmacy is interesting. There's certainly potential there. It does go in line with the approach that the company takes in terms of the way it deals with customers. Customer service appears to be a big focus for Chewy. When the CEO comes out on CNBC, as he did yesterday, and says, essentially, "We're not really worried about Amazon taking customers," in some ways, I look at that and think, "Well, what are you going to do? Go on CNBC and say, 'We're terrified.'?"
But, by the same token, customer service is an advantage that they can offer. Say what you want about Amazon, and they're great with delivery, but I don't know what I would do if I felt like it was really important for me to get someone from Amazon on the phone and talk me through something in the same way that Chewy is able to offer customer support 24/7. It's an advantage. I'm just not sure if it's --
Malin: Enough of an advantage.
Hill: -- a big enough advantage. Although, it's a $10 billion company, which is a little bit bigger than I was expecting.
Malin: I think the less people have to think about Chewy as a user, the better it is. The more convenient it is, those auto-ships, that's really their advantage. Adding the pharmacy in there just makes it one less thing you have to think about your dog. It's just going to be at your door. From that perspective, I think it is the right move. I agree with you that I'm not sure that it is enough of an advantage.
Hill: The pharmacy thing is definitely going to be worth watching. Just in the way that the pharmacy business is so crucial to global health business like CVS Health -- not that Chewy can get to be that size, but the margins on that if they do it correctly, that could actually really boost their numbers.
Malin: Right. I think that's a good caveat, though. If they can do it correctly, right? This is not a simple business. It's going to be significantly different than what they've proven to be good at so far. It'll be one to watch.
Hill: Abi Malin, always good talking to you. Thanks for being here!
Malin: Thanks for having me!
Hill: As always, people on the program 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. That'll do it for this episode of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, and we'll see you tomorrow.