This week could be a big one for Stitch Fix (NASDAQ:SFIX) investors. The apparel specialist's last earnings report included lots of potentially bad news for the business, including slumping profitability and weak user growth. But management said at the time that these issues were driven by challenges around COVID-19 and the related disruption to its supply chain.

That explanation means investors will be looking for some major improvements when Stitch Fix announces fiscal fourth-quarter results on Tuesday, Sept. 22. Let's take a closer look.

A young woman removes clothes from a box.

Image source: Getty Images.

Getting back on offense

Stitch Fix doesn't operate a network of physical stores, but its results were still hurt by closures that rocked the retailing world through May. As the company explained in June, distribution centers were closed for several weeks, and the resulting inventory bottlenecks pressured sales and profits.

Revenue fell 9% compared to the prior quarter's 22% spike. Stitch Fix generated a $34 million net loss for the period, in part because it had to limit some of its best cross-promotions due to inventory stocking problems.

CEO Katrina Lake said at the start of the fiscal fourth quarter that Stitch Fix was ready to move back into an offensive growth position. Investors should see evidence of that approach on Tuesday. Look for sales declines to moderate to near zero while gross margin moves back toward the 45% of sales that shareholders enjoyed before the pandemic struck.

Stitch Fix will ideally bounce right back to boosting its user base sequentially after it dipped to 3.4 million in the third quarter (down from 3.5 million in the second quarter). But the key metric to watch is client engagement.

Shopper satisfaction held up through the early days of the pandemic, suggesting a potentially quick and aggressive rebound for the business once its supply chain issues were resolved. That's why investors will be watching order volume, average order value, and repeat order levels for signs that the business is back on track.

Looking ahead

On Tuesday, Stitch Fix will also be looking ahead to an unusually cloudy fiscal 2021 that might be marked by volatile and weak economic trends. Its subscription-service approach will be further put to the test as shoppers look for places to cut spending on discretionary purchases like apparel.

Those risks mean investors will be focused on management's outlook during the earnings call, which should incorporate the latest demand trends through mid-September, which were supported by Stitch Fix's improved supply chain, plus some of the company's most aggressive marketing spending to date. If its user growth and order volumes responded well, then investors might reasonably expect a return to overall growth by late in the fourth quarter and a quick march back toward double-digit revenue growth over the next year.

Alternatively, another sluggish revenue result would suggest Stitch Fix faces a worse competitive landscape -- and reduced earnings potential -- for a second straight fiscal year. The business might continue to outperform the retailing industry in that scenario, but earnings will look weak in comparison to investors' pre-pandemic expectations.

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