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Stich Fix Shares Collapsed Today: Is It a Buy?

By Demitri Kalogeropoulos – Updated Dec 8, 2021 at 3:16PM

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The stock is down over 80% from its highs earlier in the year.

What happened

Shares of Stitch Fix (SFIX 6.68%) had declined more than 20% by Wednesday afternoon following a new, downbeat growth outlook. The e-commerce apparel retailer is predicting that it will lose customers in the current quarter before growth begins to recover in the second half of the fiscal year.

So what

Stitch Fix has solid advantages that might attract growth investors now that shares are down nearly 70% so far in 2021. The company maintains a highly engaged user base, for one, with over 4 million customers averaging more than $500 in annual spending on its personalized apparel deliveries.

A young woman shopping online for clothes.

Image source: Getty Images.

There's no shortage of attractive market niches for Stitch Fix to elbow into, either. It is building a strong business in the U.K. and has made encouraging inroads in niches outside of its traditional female demographic. The new direct-buy feature gives it a bigger playground to compete in for more on-demand purchases.

The problem is Stitch Fix's cloudy growth outlook. Management said on Tuesday evening that customer acquisitions will fall into negative territory in the second quarter after slowing down significantly last quarter. That shift is the main reason executives reduced their fiscal-year growth forecast to less than 10% compared to the prior outlook targeting over 15% sales gains.

Now what

Stitch Fix's stock could represent an attractive investment at a near 70% discount. Shares are down over 80% from the highs they set as recently as January, too. Much of that slump is likely an overreaction by Wall Street, considering Stitch Fix's competitive assets. It's easy to picture the stock rebounding following a better earnings report in the fiscal second quarter. 

At the same time, the company has dramatically reduced its short-term outlook twice in the past year, leaving shareholders with painful whiplash. It's understandable for Wall Street to be cautious when there's less confidence in management's short-term reading on the industry. Stitch Fix is also adjusting to the exit of founder Katrina Lake, who was CEO until April of this year.

Those qualitative issues aside, the big question is whether Stitch Fix can boost its customer acquisition rate back toward a 20% annual increase. The company's forecast suggests this won't happen until at least the second half of fiscal 2022. Given the uneven operating results in recent quarters, investors seeking a bargain might want to wait for more concrete evidence of this rebound before jumping into this growth stock.

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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