Stitch Fix Stock Plunges on Annual Guidance Cut: 6 Metrics You Should See

Stitch Fix (SFIX 2.36%) reported better-than-expected results for the first quarter of fiscal 2022 (which ended Oct. 30) after the market close on Tuesday, Dec. 7.

Shares of the online personalized-apparel retailer, however, plummeted 17.9% in Tuesday's after-hours trading session. The market's wrath can be attributed to the revenue outlook for the fiscal second quarter coming in much lighter than Wall Street had expected and to management significantly reducing its full-year revenue guidance.

Here's an overview of Stitch Fix's fiscal first quarter and guidance using six key metrics.

Image source: Stitch Fix.

1. Revenue rose 19%

Net sales for fiscal Q1 jumped 19% year over year (YOY) to $581.2 million, surpassing the $571 million Wall Street had expected. That result also beat the company's own guidance, which was for revenue of $560 million to $575 million, as outlined in my earnings preview. (The Street's consensus estimate was $571.9 million at the time of this preview.) Revenue was 1.8% higher than in the prior quarter.

Growth was driven by continued momentum in women's and kids' and in the U.K., along with a strong performance by Freestyle, which grew 40% YOY, management said on the earnings call. With Freestyle, customers choose their own items from selections generated by the company's personalized styling engine. This is in contrast to the flagship Fix offering, which involves Stitch Fix's stylists choosing items for clients. The company opened up Freestyle to new customers in the fiscal first quarter, having already made it available to existing clients.

Like many apparel retailers and some other consumer discretionary companies, Stitch Fix had a relatively easy comparable because the pandemic hurt sales in the year-ago period.

2. Active clients grew 11%

Here are Stitch Fix's two key customer engagement metrics:

Data sources: Stitch Fix. The company considers an active client to be any customer who has bought at least one item in the past 52 weeks.

Last quarter, the number of active clients increased 18% YOY to 4,165,000, and the average annual revenue per active client increased 4% to $505.

Sequentially, the company added just 15,000 net active clients, which is growth of less than 0.4% quarter over quarter. This number was lower than management had anticipated. On the earnings call, CEO Elizabeth Spaulding attributed the weaker-than-expected net client additions, at least in part, to the full rollout of Freestyle. In CFO Dan Jedda's words, "We have been iterating on new client acquisition and onboarding methods, and that has had an impact on Fix conversion [converting potential new customers into clients]."

3. Operating loss narrowed 90%

Operating loss was $1.9 million, compared to an operating loss of $19.5 million in the year-ago period.

4. Loss per share was $0.02

Net loss was $1.8 million, or $0.02 per share, down from net income of $9.5 million, or $0.09 per share, in the year-ago period. (Net income was positive in this period only because of a $28.1 million income tax benefit.) Wall Street was looking for a loss per share of $0.14, so the bottom-line result sped past this expectation.

5. Cash flow from operations soared 147%

In Q1, Stitch Fix generated $141.7 million in cash running its operations, up from $57.4 million in the year-ago period. This metric was the standout result of the quarter.

The company ended the period with $312.1 million in cash, cash equivalents, and short-term investments. This total is down from $388.3 million in the year-ago period but higher than the $231.3 million at the end of last quarter.

6. Full-year sales growth outlook has been pared back to the high single digits

For fiscal Q2 (ends on Jan. 29), management guided for revenue of $505 million to $520 million, representing growth of 0% to 3% YOY. This is a much bleaker holiday quarter outlook than Wall Street had been expecting. Analysts had been modeling for fiscal Q2 revenue of $584.7 million, or growth of 16% YOY.

More concerning is the sizable lowering of revenue guidance for fiscal year 2022 (ends July 30, 2022). Management now expects full-year sales growth in the high single digits, which we can assume means about 8% or 9%. Last quarter, it issued full-year guidance of more than 15%. On the earnings call, management cited several reasons for this reduction (as well as for the weak Q2 outlook), including the full rollout of Freestyle and global supply chain challenges.

A decent quarter, but anemic sales growth guidance is concerning

The fiscal Q1 report was decent, with operating cash flow a particularly bright spot. But the anemic revenue guidance for the full year is concerning, even taking into account that management is probably erring on the side of considerable caution.

I'll reiterate what I wrote in my earnings preview: "The company 'has yet to prove that its business model can scale and remain profitable,' as I wrote in June 2020, opining that Amazon stock was the better e-commerce play. As for pure-play retailers, I continue to favor Lululemon, whose last quarterly report was stellar." (The athletic apparel specialist is scheduled to report its latest quarterly results after market close on Thursday; here's what to watch.)

Stitch Fix is in better hands with Spaulding leading it, as she's been pushing heavily into Freestyle, which is the smart thing to do. The Fix business is going to remain a relatively small niche market, in my view. That said, I'm not sure if even a quite capable CEO can turn this company into one that can solidly, consistently, and profitably grow revenue. I'll remain open-minded, but at this point, I don't view the stock as a buy even after it's been beaten down quite a lot.