What happened
Stitch Fix (SFIX +5.66%) shares slumped on Wednesday morning, with shares falling 25% by 10:30 a.m. EDT following the apparel specialist's fiscal first-quarter earnings report.
That decline added to significant short-term losses for shareholders as the stock approaches a 70% loss for 2021.
Image source: Getty Images.
So what
Stitch Fix actually beat Q1 expectations on both the top and bottom lines. Sales rose 19% compared to forecasts for a roughly 16% increase. Earnings were surprisingly strong, too, thanks to rising prices and higher spending on its e-commerce deliveries.
Yet there was a big warning sign in the report. New customer additions slowed to an 11% pace from 18% in the previous quarter. That sluggish growth rate surprised management, it said in a conference call with Wall Street analysts, and sparked a downgrade in the company's near-term outlook.
Now what
Stitch Fix now believes sales will rise by less than 10% in the year that ends in late July. Just three months ago, that forecast imagined growth of at least 15%.
The company expanded sales by 23% in the prior fiscal year, and most investors expected the company to start moving back toward that pace in the second half of fiscal 2022 thanks to strong apparel demand and a push into attractive niches like menswear. Stitch Fix could reasonably target a significant portion of on-demand spending, too, through its new direct-buy offering.
This latest earnings report calls into question a few key elements of that bullish thesis. The prospect for a shrinking customer base in fiscal Q2 is especially tough for growth stock investors to swallow.
The good news is that Stitch Fix has a large, engaged client base that still seems eager to try out its newest apparel brands and on-demand buying options. But until management can show a reasonable path back toward accelerating sales growth, the stock might remain under pressure.
