Stitch Fix (SFIX 5.42%) plunged after its fourth-quarter earnings report last month.
Shares dipped 15.5% on Sept. 23 as the company posted a wider-than-expected loss and issued weak guidance for the current quarter, calling for revenue growth in the mid to high single digits. In a market where nearly every e-commerce stock has been on fire, investors were disappointed to see only modest growth from the company, but something surprising has happened in the weeks since.
Stitch Fix shares have suddenly surged, and the stock is now up more than 40% since its post-earnings slide. Oddly, there's been no major news out on the personalized styling service in the intervening weeks, but a number of other factors seem to be driving the stock higher. Let's look at three reasons.
Image source: Stitch Fix.
1. Amazon just validated the concept
In its Prime Day announcement on Sept. 28, Amazon (AMZN 0.89%) included a note on a new personal shopping service. The tech giant said it would be making its Personal Shopper by Prime Wardrobe available to men for $4.99 a month, adding, "the service will provide a convenient way for customers to receive curated recommendations for both men's and women's fashion from our in-house team of stylists."
The service complements Amazon's original personal shopper service for women, which was launched in 2019, and though the news may have seemed like a threat to Stitch Fix, shares of the personal styling leader actually jumped 4.8% the day of the announcement, and continued to rally from there.
Rather than acting as a threat to Stitch Fix, Amazon's decision to expand its personal shopping service from women to men shows that the company is pleased with the early results, and validates the concept of online personalized styling, which Stitch Fix pioneered.
Stitch Fix has been a popular target among short-sellers: 38% of its float is currently sold short, and a number of investors simply don't believe that the personalized styling concept has long-term traction. Amazon seems to disagree. however, and as the dominant e-commerce company in the U.S., its opinion counts for a lot.
2. Clothing sales are coming back
No retail sector has been hit harder during the coronavirus pandemic than apparel. Clothing stores, deemed nonessential businesses, were shuttered across the country in the spring, and apparel sales fell a whopping 89% in April according to the Census Bureau. But sales in the sector have gradually recovered over the subsequent months due to a combination of pent-up demand, the economy reopening, and a normalization in consumer spending.
The September retail sales report showed clothing-store sales increasing 11% from August to September, faster than any other category and an acceleration from just 1.4% growth in August. On a year-over-year basis, clothing sales were still down 12.5% from a year ago in September, but the category has made a considerable comeback from the early days of the pandemic.
Stitch Fix has been consistently gaining market share from its brick-and-mortar competitors and is likely to benefit from a broad rebound in clothing sales as it shows that the pause in clothes purchases that most Americans took during the lockdown period has ended.
3. E-commerce has a lot of momentum
Most e-commerce stocks, including Amazon, Etsy, and Wayfair, remain near all-time highs, and analysts are predicting the biggest holiday season ever for the online channel. Package shipping companies like FedEx and UPS have said that much of their capacity for the holiday season is already spoken for.
Meanwhile, the Census Bureau reported sales at "nonstore retailers" (the rough category that includes e-commerce) accelerated slightly from the second quarter to the third quarter, indicating strong demand in the online channel even as most stores have now reopened.
Other data points also signal long-term momentum for Stitch Fix. Chains like Gap are planning on closing hundreds of stores, and much of the mall ecosystem seems to be unraveling as those shopping centers are poorly positioned to thrive during a pandemic. Meanwhile, coronavirus cases are hitting record levels in the U.S. and Europe, indicating that the crisis is getting worse again before it gets better. That all means that much of the market share that e-commerce has gained during the pandemic is likely to stay in that channel, especially considering the broader pressure on brick-and-mortar stores.
The three factors above don't necessarily mean that Stitch Fix's own business performance is suddenly surging, but the trends that support its long-term growth are clearly strengthening. At the same time, the company's data science and algorithms are improving, and its customer-facing offerings, like Direct Buy, are expanding.
We won't know until December if Stitch Fix's results this quarter can justify the recent rally, but given Amazon's stamp of approval and the accelerating shift in clothes shopping from offline to online, the new round of investor confidence in the long-term potential of the business model seems warranted.
