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Why Stitch Fix Stock Dropped 11% in January

By John Ballard – Feb 6, 2020 at 1:45PM

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Valuation and earnings growth concerns are weighing on the shares.

What happened

Shares of Stitch Fix (SFIX 0.62%) lost 10.8% in value last month, according to data provided by S&P Global Market Intelligence.

There wasn't any specific news to explain the share price drop last month. The stock is up 60% since its IPO in 2017, but the shares have traded in a flat range over the last two years. 

A woman opening a box from Stitch Fix.

Image source: Stitch Fix.

So what

One reason for the flattish stock performance is its high valuation. The price-to-earnings ratio is 94, which assumes a high rate of future earnings growth. However, Stitch Fix reported a small net loss in the most recent quarter, which was a reversal of the year-ago net profit of $10.7 million. 

Management blamed increased investments in marketing, talent, and expansion in the U.K. for the earnings shortfall. 

Now what

In late January, one analyst upgraded the stock to a buy rating citing a few catalysts on the horizon. The analyst expects the company's initiatives in direct buying to improve engagement and grow revenue. The direct-buy option allows customers to buy merchandise outside of their normal Fix, and management expects this capability to stretch their long-term growth opportunity. New direct-buy offerings -- Shop Your Looks and Shop New Colors -- have been well received by customers so far.

Stitch Fix expects fiscal 2020 revenue to grow between 20.5% to 22.5% to reach $1.9 billion to $1.93 billion. Adjusted EBITDA is expected in the range of $93 million to $107 million. 

John Ballard owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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