Stitch Fix (NASDAQ:SFIX) reported second-quarter results for fiscal 2020 after the market closed on Monday, March 9. Investors in need of a good-news fix amid the market's coronavirus-driven sell-off didn't get it from the online personalized apparel retailer.
While the company managed to beat the Wall Street consensus estimate on the bottom line, it missed on the top line -- and sales growth is particularly important at this early stage in Stitch Fix's life as a public company. (Stitch Fix held its initial public offering just over two years ago, in November 2017.) Moreover, the company's third-quarter revenue outlook came in lighter than analysts had been expecting, and it lowered its full-year revenue guidance. Even in the best of times, the market often reacts with fury when companies pare back their previously issued outlooks.
I had a feeling a full-year guidance cut was coming. I ended my Stitch Fix earnings preview on this note: "In the midst of the market's coronavirus sell-off, expect Stitch Fix stock to get slammed if the company's Q3 revenue outlook is weaker than expected or if it pares back its full-year revenue guidance."
Shares were, indeed, slammed. They closed down a whopping 37.8% in Monday's after-hours trading session. That doesn't bode well for their performance on Tuesday.
Here's an overview of Stitch Fix's second quarter, along with its guidance for the third quarter and full year, using seven metrics.
1. Revenue jumped 22%
Net quarterly sales increased 22% year over year to $451.8 million, falling short of the $452.5 million Wall Street had expected, and landing near the middle of the company's guidance range of $447 million to $455 million.
Last quarter, sales also grew 22% year over year.
2. The number of active clients grew 17%
Here are Stitch Fix's two key customer engagement metrics:
Fiscal Q2 2020
Number of active clients
Average annual revenue per active client
Sequentially, the year-over-year growth in the number of active clients accelerated slightly, since this metric was 16.7% last quarter. However, growth in the average annual revenue per active client decelerated, as this metric was 9.5% last quarter and about 7.5% when we adjust for the extra week in fiscal 2019 relative to fiscal 2018.
Stitch Fix considers an "active client" to be any customer who has checked out at least one item from a "Fix" or received at least one item ordered from its direct-buy function in the last 52 weeks.
3. Operating income dropped 45%
Operating income came in at $8.5 million, down 45% from the year-ago period. The decrease was driven by Stitch Fix's continued aggressive investing in growth initiatives.
Gross margin was not a factor in the operating income decline, as it edged up slightly to 44.8% from 44.1% in the year-ago period.
4. Earnings per share slipped 8%
Stitch Fix posted net income of $11.4 million, or $0.11 per share, compared with net income of $12.0 million, or $0.12 per share, in the second quarter of last fiscal year. Wall Street was looking for earnings per share of $0.06, so the company easily surpassed this expectation.
5. Operating cash flow fell 34%
Operating cash flow fell 34% year over year to $38.2 million. The company ended the quarter with $166 million in cash and cash equivalents, down slightly from $167.5 million in the year-ago period.
6. Q3 revenue is expected to grow 14% to 16%
For the third quarter, management guided for net sales between $465 million and $475 million, representing growth of 14% to 16% year over year. This outlook falls significantly short of the $506.2 million Wall Street had been projecting.
7. Full-year revenue-growth guidance was cut by 6 percentage points
Management lowered its revenue guidance for the full year to $1.81 billion to $1.84 billion, which represents growth of 17% to 19%, adjusted for the extra week in the last fiscal year relative to the current year. The previous fiscal 2020 outlook was for revenue of $1.90 billion to $1.93 billion, or apples-to-apples growth of 23% to 25% year over year.
In the shareholder letter, Stitch Fix attributed the guidance cut to both company-specific and macroeconomic factors. The macro factor is obvious: the uncertainty surrounding the COVID-19 outbreak with respect to the company's supply chain and consumer demand. So far, Stitch Fix said it hasn't been negatively impacted by the coronavirus.
The other factors that have caused Stitch Fix to lean more conservatively in its outlook include customers spending less per Fix than it anticipated, which it attributed in part to "heightened promotional activity across retail," and customer acquisition costs rising in some key digital channels.
A decent quarter, but the tepid outlook is concerning
Stitch Fix turned in a decent quarter relative to analysts' expectations. However, both the third-quarter and full-year revenue outlooks are quite tepid. It's no wonder investors punished the stock in after-hours trading on Monday.
Does a big sell-off in Stitch Fix stock (assuming Monday's after-hours drop translates into a similar move on Tuesday) present a buying opportunity now? Not in my opinion. For now, investors should stay away from this stock, along with the vast majority of consumer discretionary stocks. This coronavirus-fueled sell-off probably isn't close to being over.