Stitch Fix (SFIX 6.15%) has some big questions to answer for investors in its upcoming earnings report. The apparel retailer's stock surge reflects optimism that a sharp rebound is happening in its online niche, which would help the business build on the encouraging fiscal fourth-quarter metrics that management announced in late September. Stitch Fix was able to boost sales in that period even though the wider industry contracted.
Yet the recovery could still be rocky going forward. In fact, there were some warning flags in the chain's last quarterly announcement that pointed to struggles ahead in a few key areas, including membership and profitability.
Let's take a closer look at what to expect when Stitch Fix reports fiscal 2021 first-quarter results on Monday, Dec. 7, focusing on three trends investors should be interested in.
1. Another tough quarter for the industry
Stitch Fix achieved a quick growth rebound last quarter when sales rose 11% compared to the 9% drop it reported during the pandemic-influenced third quarter that ran through early May. CEO Katrina Lake and her team said they were thrilled to have gained market share even though the apparel industry shrank. Stitch Fix struck a chord with its new direct-buy option and continued to push into complementary niches like menswear and kids' clothing.
However, executives hinted at a tough growth period ahead as demand for apparel is pressured by social distancing efforts. Stitch Fix is also seeing a shift away from many of its more fashionable products and toward leisurewear that requires it to refocus its inventory.
Overall, Wall Street is predicting a minor step backward this quarter as sales growth slows to about 8% from 9% last quarter. Lake didn't issue a specific outlook but in late September suggested that revenue gains would be light in the first and second fiscal quarters before speeding up in the second half of the year.
2. Advertising spikes
Stitch Fix paused its marketing program during COVID-19 shutdowns because its supply chain was overwhelmed by factory closings. Advertising spending raced back to over 9% of sales last quarter, but the temporary shutdown might still impact growth over the next few quarters, management warned.
Shareholders would like to hear Lake temper that bearish outlook in this announcement. If the company can adjust its marketing and merchandising to better reflect the mood of its customers, then Stitch Fix could bounce back to accelerating growth over the holiday shopping season. Stumbles in these areas, on the other hand, would show up in weak gross profit margins, elevated advertising spending, and sluggish new customer engagement. They'd pressure overall earnings, too.
3. Looking ahead
The chain's long-term growth potential won't be harmed even if the next few quarters show unusually slow user additions. Stitch Fix is building a loyal shopper base and has already demonstrated that it can extend its influence into new apparel niches and different selling models.
Investors have responded to that bright outlook by pushing the stock higher in the last few months. The rally makes it likely that shares will drop if Stitch Fix doesn't show impressive operating results on Monday. But, assuming management still sees a return to their robust growth profile by late fiscal 2021, any stock slump might be more of a buying opportunity than a reason for shareholders to panic.