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Why Stitch Fix Stock Popped Monday

By Rich Smith - Mar 15, 2021 at 4:49PM

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Or not so much "why" -- but what to do about it.

What happened

Shares of online clothier Stitch Fix (SFIX 2.66%) climbed steadily throughout the trading day Monday, ultimately closing 10.9% higher than it began the day.

There wasn't any particular reason why this happened, however.

Stock up glowing green arrow climbs on a stock screen

Image source: Getty Images.

So what

Oh, I suppose I could tell you that Stitch Fix stock is recovering from the losses it took after reporting a second-quarter "sales miss" last week and warning of another sales miss in its fiscal third quarter currently underway. But that would be more a description of what's happening than an explanation of why it is happening. Fact is, there is no "why" today -- no analyst upgrades, no filings with the SEC, no news from the company. Nothing substantive at all.

So in the absence of any clear "why," let's take a look at what you might want to do about Stitch Fix stock going up: Do you buy into the rally or use it as a chance to exit the stock at prices better than what it fetched immediately after earnings?

Now what

Personally, if I owned Stitch Fix right now, the numbers would be telling me to start getting ready to sell. In the middle of a pandemic that encouraged shoppers to stay at home and spend their disposable income online, online retailer Stitch Fix succeeded in growing its sales only 11% in its fiscal first half. It also failed to translate those sales into profits, and earnings went from positive $11 million in last year's first half (H1) to negative $11 million in this year's first half (H1).

Cash from operations evaporated, dwindling from more than $38 million a year ago to less than $6 million this year. Capital spending went the other way, resulting in $8.2 million in cash burn so far this fiscal year (versus positive free cash flow last year).

None of this is good news for Stitch Fix. The only bit of good news I see, really, is the same news that alarmed investors last week. Stitch Fix doesn't expect sales to stack up to analyst estimates in Q3, but the $505 million to $515 million in sales it does foresee in fiscal Q3 2021 work out to 25% sales growth versus fiscal Q3 2020. If Stitch Fix hits that number and if it doubles its growth rate even in the face of physical stores starting to reopen again and giving it more competition, I suspect this will mean Stitch Fix has weathered the storm, earnings could turn positive again, and things will work out fine. If it misses again in Q3, however, it might be time to throw in the towel.

So to speak.

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