Stitch Fix (SFIX 0.47%) will report results for its fiscal second quarter on Tuesday, March 8, after the market closes. Wall Street analysts have soured on the stock lately, with the company forecasting flattish top-line growth for fiscal 2022 (which ends in July).
After seeing its stock price fall 85% over the last year, Stitch Fix has a market cap of just $1.3 billion, while generating trailing-12-month revenue of $2.2 billion.
At this low price-to-sales valuation level, this innovative styling service might be a bargain, but investors should probably wait until after earnings before buying shares. Here are the key things to watch when Stitch Fix reports earnings.
Image source: Stitch Fix.
Guidance
Management previously forecasted revenue to grow by 15% or more in fiscal 2022, but guidance was revised downward during the fiscal first-quarter earnings report. The company now expects fiscal 2022 revenue to be up in the high-single-digit range.
| Company Guidance | Fiscal Q2 2022 | Change (YOY) |
|---|---|---|
| Revenue | $505 million to $520 million | 0% to 3% |
| Consensus EPS estimate | ($0.29) | (45%) |
Data source: Stitch Fix and Yahoo! Finance. YOY = Year over year.
While management doesn't provide specific earnings guidance, Wall Street analysts expect Stitch Fix to report a loss of $0.29 per share for the fiscal second quarter and a loss of $0.94 for the full year.
What went wrong last quarter
In September, Stitch Fix launched its new Freestyle service. It's potentially a very disruptive service in the apparel industry. When clients sign up, they are asked to fill out a profile that informs Stitch Fix about sizing and style preferences. Stitch Fix also uses a little game in the app called Style Shuffle, where clients rate items they like with a thumbs up or thumbs down.
The company uses all this data to show personalized items for each client whenever they open the app. All the times they see are in stock, consistent with their style, and everything is in the right size. It can save shoppers hours browsing multiple stores online.
What Stitch Fix is doing with data could be explosive for revenue growth over time, but so far, Freestyle hasn't delivered the results in active client growth the company expected out of the gate.
"Since the full rollout of Freestyle, we have been iterating on new client acquisition and onboarding methods, and that has had an impact on fixed conversion," CEO Elizabeth Spaulding said on the fiscal first-quarter earnings call.
The company launched a referral program last year that led to new clients signing up that were not interested in using Stitch Fix for long. The company subsequently ended this program, because it led to a wave of weak leads in new signups that didn't stick around long. This caused active client growth to decelerate from 18% in the fiscal fourth quarter to 11% in the most recent quarter.
Revenue per client is trending higher
Stitch Fix is still tweaking its onboarding process with the service and fine-tuning its marketing to attract the most loyal clients. Guidance calls for a sequential decline in active clients in the fiscal second quarter, but management expects this metric to return to growth in fiscal Q3.
The good news is that the last quarter showed progress in driving higher engagement from Stitch Fix's existing 4.1 million active clients. "We're seeing healthy retention and engagement rates for new and recently acquired clients, which is driving the highest [revenue per active client] we have ever experienced," CFO Dan Jedda said on the fiscal Q1 2022 earnings call in December. Revenue per client has been trending up in recent quarters, which is very encouraging.
| Metric | Fiscal Q2 2021 | Fiscal Q3 2021 | Fiscal Q4 2021 | Fiscal Q1 2022 |
|---|---|---|---|---|
| Revenue per active client | $467 | $481 | $505 | $524 |
| YOY change | (7%) | (3%) | 4% | 12% |
Data source: Stitch Fix. YoY = year-over-year.
When the company reports fiscal second-quarter earnings on March 8, investors should watch for continued improvement in revenue per client. If Stitch Fix meets its revenue guidance and reports healthy trends in underlying engagement metrics, that could be a green light to consider buying the stock.
On the last earnings call, management mentioned that categories like footwear, accessories, and dresses saw a 50% year-over-year increase through Freestyle. This level of spending is five times higher than what the company saw through regular Fixes, so if the company can steer more clients toward Freestyle, Stitch Fix should come out on top in the end.
