Stitch Fix (SFIX -2.89%) stock had been rallying in the weeks leading up to its quarterly earnings report released earlier this week, but shares still soared following the announcement.
Investors had an inkling that the online apparel seller would post improving operating results as it worked through challenges related to its warehouse shutdowns earlier in the year. Yet Stitch Fix's stock price bounce this week shows how detached reality was from those high expectations.
Let's take a look at the main metrics that suggest the business is on a fundamentally stronger footing and three reasons why even the Wall Street bulls underguessed Stitch Fix's popularity.
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1. A deeper competitive moat
Stitch Fix's market-share gains over the last few years suggested that the online apparel retailer was achieving a defensible position in the industry. This week's results add weight to that bullish reading.
In fact, the company notched double-digit percentage growth in its client count through late October. The 240,000 customers it gained in the last three months was Stitch Fix's best quarter-to-quarter increase on record, CEO Katrina Lake said in a conference call. It was even more notable given that the boost happened at a time when many retailing stores are shrinking due to COVID-19 pressures.
Stitch Fix leaned on several competitive assets, including its recommendation algorithm and direct buy offerings, to win market share both in its core women's demographic and in new areas like men's and kids' clothing. "We're excited about the momentum in our business," Lake said in a press release. Investors are excited, too.
2. A flexible business
Investors were left smarting in the spring after Stitch Fix revealed serious pandemic-related challenges in its supply chain. While most retailers struggled during COVID-19 closures, its warehouse closures pressured sales and threatened to hurt profitability for several additional quarters. The concern was that Stitch Fix might be caught flat-footed as shopper behavior went through a once-in-a-century disruption.
But the chain proved its resiliency this past quarter. Not only did Stitch Fix recover lost ground on growth and profitability, but it reworked its inventory as demand shifted toward athleisure wear and away from the more fashion-forward merchandise that had been its main draw. This pivot says good things about management's ability to adjust to even the most dramatic changes in shopper preferences.
3. More engaged customers
It was client engagement that really stuck out as a highlight of the Q3 report. Stitch Fix achieved some of its best customer satisfaction on record, judging by the rate at which shoppers chose to purchase at least one item from their scheduled deliveries while saying they looked forward to their next styling. Executives said nearly 80% of new customers met those criteria, which implies that these new additions may provide even more of a growth lift over the next few quarters.
Those highly engaged subscribers have management predicting that revenue growth will soon return to the over-20% rate that investors had enjoyed before the business hit its snags in early 2020.
Investor takeaway
Faster expansion is one key factor behind the success of this growth stock. But investors should be even more excited about the way this report speaks to Stitch Fix's potential to build a highly responsive business that can compete in any area of the apparel industry. Success there means there'll be more positive surprises in store for shareholders in 2021 and beyond.
