Stitch Fix (NASDAQ:SFIX) shares soared after hours on Monday as the personalized styling service smashed estimates in its fiscal 2021 first-quarter report.

Revenue grew 10.3% to $490.4 million, ahead of expectations at $481.2 million, and growth was driven almost entirely by new customers as active clients rose 10.2% to 3.8 million. On the bottom line, adjusted EBITDA, the company's preferred profitability metric, slipped from $17.3 million to $6.9 million as a hiring spree on tech talent led to higher costs. On a generally accepted accounting principles (GAAP) basis, the company posted earnings per share of $0.09, which compared to the consensus estimate of a loss of $0.20 per share. However, excluding a special tax benefit, the company would have had a per-share loss of around $0.15.  

Stitch Fix, like much of the apparel industry, has struggled during the pandemic, but the quarter showed the company putting the challenges of the public health crisis behind it as it had earlier been forced to shutter warehouses and suffered from lagging demand. Its business is now back on track and it's returned to its prior growth strategy.

Let's take look at three other reasons why the stock was soaring to near all-time highs on the results.

A Stitch Fix customer looking at the cards showing the clothes she got

Image source: Stitch Fix.

1. Record sequential customer growth

The company grew active clients in the quarter, which is defined as clients who have purchased an item from Stitch Fix in the last year, by a record 241,000 from the previous quarter, showing the company is rapidly acquiring new customers even as it continues to experience pandemic-related headwinds as office work and social events are still largely non-existent. Despite the challenges from the pandemic, the company also believes it's benefiting from strong product/market fit as more shoppers turn to online channels for the clothes they need.  

Management also believes successful first Fixes -- the boxes of five items that it sends to customers -- are crucial to customer retention, and in its last two quarters, nearly 80% of new customers kept at least one item from their first Fix and said they were looking forward to their next one. That was the highest level for those metrics in five years, and it shows a strong pipeline in customer acquisition as well as the company's ability to convert new customers to long-term ones. One of Stitch Fix's advantages is that most of its customers shop on an auto-ship basis, creating a reliable recurring revenue stream for the company. The success with new customers as well as existing ones, which also had record-high success rates, also shows that the company's data science model is working and that its algorithms are getting stronger.

2. A big new hire

Stitch Fix's COO/CFO Mike Smith announced last month that he would be stepping down to start his own venture capital firm. Smith had joined the company in 2012, shortly after its founding, and some growth stock investors might take this as a warning sign of trouble, especially when a top executive like Stitch Fix's previous CFO, Paul Yee, had left just the year before. Stitch Fix shares fell 4% the day after the news broke, but the company has already found an impressive replacement.

Dan Jedda, who comes from Amazon, where he was the Vice President and CFO of Digital Music, Digital Video, Advertising, and Corporate Development, will start as CFO on Dec. 9. Amazon is the gold standard in e-commerce, and the company is admired by investors for its customer-centric mission, operational excellence, and creative problem-solving. That Stitch Fix was able to recruit Jedda to the job just a few weeks ago shows the CFO post was an attractive one, and Jedda's experience with Amazon should be particularly valuable to a young e-commerce company like Stitch Fix.

CEO Katrina Lake said, "Dan brings extensive experience funding and scaling some of the most innovative businesses at Amazon. Dan will play a critical role in helping us expand our personalization platform to deliver the most relevant, resonant and delightful shopping experiences to consumers everywhere."

3. Guidance was impressive

Perhaps the biggest reason for the surge in Stitch Fix's stock after hours was the company's guidance for the rest of the year. After suspending its forecast during the height of the pandemic, Stitch Fix was confident enough in its visibility to call for full-year revenue growth of 20%-25% to $2.05 billion-$2.14 billion, ahead of the consensus at $2.01 billion. That includes muted guidance for the second quarter, the current one, as the company is still experiencing headwinds from the pandemic and sees revenue growth at 12%-14%. In other words, the company is targeting growth in the second half of the year at close to 40% at the high end as it will benefit from lapping the weak second half of fiscal 2020 and tailwinds from expected pent-up demand as people return to social and professional events. The company should also be able to keep the market share gains it's made as many of its brick-and-mortar competitors have been driven into bankruptcy by the pandemic, or are badly wounded.

A short squeeze likely added fuel to this latest rally as the stock jumped 34% in the after-hours session, and it came with 41% of the float sold short. However, the results themselves were the reason for the gains, and that, along with the company's steady innovation, improving success rates, and tailwinds from new customer growth mean that the stock could be just starting to break out.

Stitch Fix is a unique company with huge potential. With the worst of the pandemic behind it, the company should continue to sprint ahead of its competitors.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.