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Here's Why Stitch Fix Dove 25% Today

By Demitri Kalogeropoulos – Dec 8, 2021 at 11:04AM

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Management pulled down expectations as customer additions slowed.

What happened

Stitch Fix (SFIX 1.48%) 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.

A delivery man dropping off packages at a doorstep.

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.

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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