Please ensure Javascript is enabled for purposes of website accessibility

Is Stitch Fix Stock a Buy?

By Jon Quast - Apr 21, 2021 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This new direction could jeopardize one of the company's strengths.

You want an exercise in futility? Try buying a stock based solely on how its stock price swings. Stitch Fix (SFIX 7.55%) exemplifies this futile exercise perfectly. After all, some investors just look for stocks that are down. These investors may want to buy Stitch Fix considering it's almost 60% below 52-week highs.

However, other investors avoid stocks that have already appreciated significantly. These investors, therefore, probably don't want to buy Stitch Fix -- they feel like they've missed the boat. Because even though it's down sharply from highs, it's still up almost 200% over the past year.

Therefore, if you've anchored to the highest price per share for Stitch Fix, then now looks like an opportunistic buy. But if you've anchored to the lowest price, then now seems too late to buy Stitch Fix. For this reason, I'd encourage you to give up the futility of market timing and instead buy great businesses for the long haul.

Here's why Stitch Fix could be one of these great businesses. That said, it's success isn't a foregone conclusion, as we'll see.

A woman opens a package from Stitch Fix.

Opening a box from Stitch Fix. Image source: Stitch Fix.

Why it could be a winner

Stitch Fix sits at the intersection of e-commerce and data science -- two important tailwinds that could create stellar shareholder returns in the long term. Consider that most of our apparel shopping still happens at a physical place, but apparel e-commerce is quickly growing. According to Statista, the U.S. apparel market was almost $111 billion in 2020 but is expected to grow to almost $154 billion by 2024. And Stitch Fix is an apparel e-commerce pure play.  

Stitch Fix puts together shipments (a "Fix") for women, men, and children based on individual measurements and style preferences. If you like what it sent you, you buy it. If not, you send it back to the company. 

This is where Stitch Fix's data science comes in. Fixes are assembled based on what the data says that person will want to buy. This data has been accumulated through all of its past shipments. But even when customers return items, it's not a total loss; this contributes to the feedback loop that improves future shipments. Many other apparel companies don't collect consumer data like this, and it could be a competitive advantage for Stitch Fix. 

Looking at Stitch Fix's inventory management confirms that its data-driven approach is working. For one example of inventory management, consider that it only launched children's clothes two years ago. But in 2020, its success rate (the amount of inventory selling through) improved by 15% year over year. Therefore, it appears its better data over the last two years is leading to better inventory selection and better results.

In summary, Stitch Fix's superior consumer data could make it a winner as the shift to apparel e-commerce accelerates. And yes, I think the investing thesis for Stitch Fix can really be this simple.

A red exclamation point leans against a wall while standing on a wood floor.

Image source: Getty Images.

Where it could go wrong

There was a recent shake-up with Stitch Fix's management team. Founder Katrina Lake is stepping out of her CEO position and president Elizabeth Spaulding is taking over. But by itself, I don't think this development alters the investing thesis. With her experience, Spaulding appears to be up to the task, and Lake is staying involved in the company.

However, the move to Spaulding is indicative of bigger changes for Stitch Fix, and herein is the biggest risk that I see. Until recently, the company's primary business has been its Fixes. But its current experiments include allowing customers to decline certain items before they even ship, offering its entire inventory online through something called Direct Buy, and connecting its stylists to customers through a 30-minute video chat.

Spaulding has spearheaded many of these new initiatives for Stitch Fix. Therefore, her promotion to CEO suggests the company is doubling down on the early successes of this new direction, allowing its traditional business to fade in significance in the future. The management team believes Direct Buy especially expands its addressable market. But here's the risk: Not all business transitions go smoothly, and this could cause the business to stumble.

Moreover, I believe part of Stitch Fix's past success stems from consumers getting clothes picked out by professionals. These items may not have been what these consumers would have otherwise picked for themselves, and they may be pleasantly surprised to discover they like them. But by giving consumers more control in the selection process, it seems Stitch Fix risks becoming just another generic e-commerce experience.

The bottom line

I believe its e-commerce focus and data-driven decisions make Stitch Fix a good stock to buy right now. That said, I'd still mentally categorize it as a more speculative investment, given that its newer business initiatives still need more time to prove their merit.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

StitchFix Stock Quote
$5.27 (7.55%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.