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Why Stitch Fix Stock Plunged Today

By Jeremy Bowman - Mar 9, 2021 at 11:41AM

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Shares of the personalized online styling service fell on a weak second-quarter earnings report.

What happened

Shares of Stitch Fix (SFIX 5.99%) were plunging after the personalized online styling service turned in disappointing results in its fiscal second quarter, missing both analyst estimates and the company's own guidance. The company also lowered its full-year guidance, adding to investor concerns.

The stock was down 27.2% as of 10:38 a.m. EDT.

A closet showing Stitch Fix items

Image source: Stitch Fix.

So what

Stitch Fix stock had surged following its first-quarter earnings report back in December, but the company failed to deliver a repeat performance this time around.

Revenue in Q2 rose 11.6% to $504.1 million, which was short of analyst expectations at $512.2 million and below the company's own guidance at $506 million to $515 million. Management blamed the disappointing top-line growth on shipping delays, echoing a number of e-commerce companies that have complained of bottlenecks in deliveries due to the crush of demand during the holiday season and other shortages in the shipping industry during the pandemic.

The company added 110,000 active clients from the previous quarter, a positive sign, and saw its highest growth in first Fixes, showing new customer acquisition and its demand pipeline was strong. But that was not enough to counteract the weak numbers.

Results further down the income statement were also underwhelming. Gross margin fell 190 basis points to 42.9%, primarily due to increased shipping expenses. Selling, general, and administrative expenses jumped from 42.9% to 50.9% of revenue, due to a wage hike to $15/hour minimum for warehouse workers, as well as increased marketing expenses and COVID-19-related costs. As a result, adjusted EBITDA fell from $30.1 million in the quarter a year ago to a loss of $8.9 million, below the company's own guidance range of a loss of $3 million to $6 million.

Focusing on the long-term opportunity, CEO Katrina Lake said, "The fundamentals of our business are strong, we continue to expand our service in innovative new ways, and we are excited to continue to deliver on our strategy."

Now what

Stitch Fix's guidance was impacted by ongoing shipping delays and its decision to wait to roll out its direct buy offering until the end of the fiscal year. Consequently, the company dialed down its full-year revenue forecast to $2.02 billion to $2.05 billion from $2.05 billion to $2.14 billion, or 18% to 20% growth from a prior range of 20% to 25%. Understandably, investors were disappointed with that update.

While Stitch Fix continues to make improvements in its product offerings, expanding the ways it can attract and retain customers, the company is also meeting unexpected challenges. Though those appear to be temporary, it's clear why this growth stock tumbled, especially after it surged over the last few months.

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