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Stitch Fix (Finally) Has a Good Handle on its Growth Prospects

By Demitri Kalogeropoulos - Jun 11, 2021 at 8:01AM

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The apparel specialist upgraded its outlook just three months after lowering it.

Stitch Fix's (SFIX -0.49%) cloudy read on its short-term growth prospects worked in investors' favor this past week. The stock surged after the online apparel seller dramatically outperformed the sour outlook that management issued just three months ago. The whipsaw move was amplified by another significant change in the company's 2021 outlook, its third such shift in a row.

Stitch Fix now believes it is on a faster expansion path and has put some major supply chain and shipping challenges behind it. But are investors exposing themselves to another surprise growth downgrade like the one that sent the stock reeling in early March? Let's take a closer look.

Delivery person dropping off boxes at a home.

Image source: Getty Images.

Beating a lowered target

Stitch Fix sailed past management's last forecast, which called for sales to land between $505 million and $515 million, equating to roughly 39% growth. Instead, revenue rose 44% to $536 million as user gains accelerated to 20% compared to last quarter's 12% boost. That marked the second straight quarter of faster core growth. Stitch Fix gained 234,000 active clients since the prior quarter, representing its second highest quarterly boost to date.

There was other good news on the sales front, including high engagement across core categories like women's and newer niches like men's and kids' wear. Stitch Fix found success with new offerings like its direct buy functionality, and its buyers didn't struggle to procure the right merchandise. "Consumers are turning to us for fresh inspiration," incoming CEO Elizabeth Spaulding said, "and our radically convenient, personalized shopping experience."

Better finances

Stitch Fix seems to have found a quick fix for the shipping challenges that torpedoed growth and profits last quarter. Executives blamed slower shipping rates and higher expenses for pressuring sales and harming profit margins last quarter while warning that the issues might continue. But there was no mention of shipping problems in their latest comments to shareholders. Gross profit margin jumped to 46% of sales after having slumped in the last year.

SFIX Gross Profit Margin Chart, showing downward trend over last two years.

Profit margin through the prior quarter. SFIX Gross Profit Margin data by YCharts.

That spike reflected a strong inventory position and eager buyers. The company even credited lower transportation costs for helping lift its finances. "We were very pleased with our outperformance in Q3," Spaulding said.

Looking ahead

Investors saw a third straight shift in management's short-term outlook, this time in the positive direction. Sales should now reach roughly $2.1 billion this year, equating to a 21% increase. That forecast had stood at between an 18% to 20% increase three months ago. In early December, management predicted revenue would rise by between 20% and 25% this fiscal year.

Stitch Fix hasn't strayed far from that initial forecast, but the stock price has been volatile due to worries about sales growth, inventory management, and profitability. The company's latest earnings calmed each of those concerns and fed the bullish narrative that sees the e-commerce specialist capturing an expanding portion of an attractive market.

Shares understandably spiked in response to the brightening outlook. But the better news might be that Stitch Fix is getting a good handle on its growth prospects and might avoid surprising downgrades in future quarters.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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