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Why Stitch Fix Stock Plunged 47% in March

By John Ballard - Apr 3, 2020 at 12:24PM

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Before we knew the full extent of the COVID-19 outbreak, the company issued a weak outlook that sent the shares tumbling.

What happened

Shares of Stitch Fix (SFIX -0.41%) dropped 47.1% last month, according to data provided by S&P Global Market Intelligence. As negative sentiment was bringing the broader market down early in the month, Stitch Fix issued a disappointing outlook for fiscal 2020. 

While management anticipates some pressure on revenue growth related to economic weakness over the COVID-19 outbreak, the main reason for the lowered outlook given on March 9 was a promotional retail environment due to heightened competition throughout the retail industry. 

A woman opening a delivery from Stitch Fix

Image source: Stitch Fix.

So what

Stitch Fix reported strong results for the fiscal second quarter, with revenue and active clients up 22% and 17% year over year, respectively. Another positive was that net revenue per active client increased 8% year over year to $501, which is a sign that existing clients are happy with the service as Stitch Fix gets better at learning each client's taste. 

The company also showed a small profit of $11 million for the quarter even as it continues to invest to support its long-term growth initiatives.

Despite the momentum in attracting new customers, Stitch Fix experienced lower order values than management anticipated, which management attributed to a "heightened promotional environment" in the retail industry. During the call, CEO Katrina Lake said, "We think it's responsible to reflect this trend in our second half forecast."

Now what

The outlook calls for full-year revenue to decelerate to a range of 15% to 17% year over year on a 53-week basis. Part of the soft outlook reflects efforts to grow the assortment of lower-priced products to stretch its universe of clients. 

As for the potential impact of the COVID-19 outbreak, Lake said, "To date, we haven't yet seen a material impact on our business," but she added, "it's reasonable to expect we'll see some impact." 

Keep in mind, this guidance was given on March 9, before many businesses had shut down, causing unemployment claims to spike in late March. 

Stitch Fix ended the quarter with $300 million in cash and short-term investments on the balance sheet and no debt, which provides a cushion in the short term. 

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