What happened
Shares of apparel-company Stitch Fix (SFIX -4.44%) are skyrocketing today after reporting results for its first quarter of fiscal 2021. Many traders were actively betting against a good quarter, but the company impressed Wall Street with its active-customer growth. Thanks to that surprise, the stock is soaring today, up a whopping 39% as of 10:20 a.m. EST. It even traded as much as 53% higher earlier in the day.
So what
Looking at just the numbers, one might not understand why Stitch Fix stock is up so much today. The company generated net revenue of $490 million, which was only up 10% year over year. And it was a profitable quarter, but only came in at $0.09 per share.
However, this was a reversal from recent revenue declines and mounting losses. That's a positive development, but active-client growth is what really stole the show.
Image source: Stitch Fix.
Stitch Fix added 240,000 net customers just during the past quarter, the most it's ever added in a quarter. It did this while spending less on advertising, helping the bottom line.
But management also believes it's off to a good start with these new customers. A successful first "Fix" (shipment) is one where the client purchases at least one item and looks forward to the next shipment. About 80% of first Fixes in Q1 were successful, boding well for the lifetime value of the customer.
As already mentioned, Stitch Fix returned to profitability due, in part, to spending less on advertising as a percentage of revenue. However, it should be noted the company reported an operating loss of $19.5 million, all the same. A one-time tax benefit of $28 million is what truly propelled the company to profitability.
Now what
Here's where things get a little interesting. Investors can make money when a stock goes down by shorting stocks. In Stitch Fix's case, a lot of people were doing just that. According to data from Nasdaq, 21 million shares were sold short as of Nov. 13, representing about 20% of shares outstanding. Without wading too far into the weeds, allow me to simply say that's a lot.
When there's high short interest in a stock and the stock is going up, it can create a snowball effect called a short squeeze. Basically, the shorts decide to move on but they have to physically purchase shares to close their positions. This often means there are more buyers than sellers, sending the stock higher still.
According to Nasdaq, it would take 14 trading days for shorts to cover their Stitch Fix positions right now. Therefore -- even though I would advocate maintaining a long-term investor mentality -- don't be surprised if this growth stock keeps rising in the near term.
