Stitch Fix (SFIX -1.79%) earnings are almost always followed by a big swing in the stock, and the latest report was no exception.
Shares of the online personalized styling service tumbled almost 16% following the release, even though the company beat top-line estimates in its fiscal fourth quarter. Adjusted for an extra week in the year-ago period, revenue rose 11% year over year to $443.4 million, well ahead of expectations at $414.9 million. On the bottom line, the company posted a per-share loss of $0.44, which included a special non-cash tax expense of $43.2 million. On an adjusted EBITDA basis, the company's preferred profitability measure, Stitch Fix lost $8.3 million (that figure swung to a profit of $11.8 million when excluding share-based compensation).
Investors seemed to have expected more, and guidance may have also thrown off investors as the company said it expected just mid-to-high single digit revenue growth in the fiscal first quarter. Though new customer growth has been strong with the number of women ordering their first "Fixes" up 25% last quarter, the company is still facing headwinds from a pullback in marketing and demand when the coronavirus lockdowns started in March. As a result, Stitch Fix is not getting the subsequent orders from customers it expects to receive. Management sees that as a headwind lasting through the first half of fiscal 2021, which started on Aug. 2.
Image source: Stitch Fix.
Delayed gratification
Stitch Fix has been public for nearly three years, and on multiple occasions, the stock has seemed poised for a breakout, only to disappoint the market. The latest results were yet another one of these events.
In its quarterly letter to shareholders, management urged investors to be patient, calling for growth to improve in the second half of the year as it laps the challenges during the lockdown period and as the economy is expected to normalize.
Management also said the company would begin to leverage investments in the last two years in launches like the kids line and the expansion into U.K., leading to an increase in adjusted EBITDA margin. It also expects $30 billion in apparel market share to move online in 12 to 18 months, and management believes that it can capture a sizable portion of that as physical stores close and mall traffic dwindles.
Plenty of positive signs
Despite the relatively slow growth and the bottom-line loss, there were a number of positive signs that show the business is gaining traction. In the women's segment, first fixes were up 25% during the quarter, hinting at a strong new customer base.
Due to the pandemic, the company shifted away from its core strategy of selling workwear and going-out clothes, instead moving more toward athleisure as women's activewear jumped by more than 350%. In the plus segment, first fixes were up by more than 35% year over year, and growth was strong for men as well. Finally, its success rate in the kids line, or the percentage of time an item is purchased by a client, was up 15% since Stitch Fix first began serving that market two years ago, and U.K. average order values were up 40% in fiscal 2020.
All that progress is laying the groundwork for future growth, but investors won't be impressed until it shows up on the top and bottom lines.
The curse of high expectations
Arguably, no clothing company today holds more promise than Stitch Fix. With programs like Direct Buy, the company has a ton of optionality ahead of it, and its focus on recommendation algorithms gives it a unique advantage that should only get stronger as the algorithm improves.
Still, the pandemic has been an unquestionable setback for this growth stock, and investors will need to delay their expectations as the company is forecasting at least two more quarters of pandemic-related challenges. For a company with so much potential, it's not a surprise to see investors disappointed with the latest results and guidance calling for single-digit growth.
Stitch Fix's investments should eventually pay off, but for now, investors will just have to wait.
