What happened
Shares of Stitch Fix (SFIX 0.47%) fell as much as 13% this week, according to data from S&P Global Market Intelligence. The online styling service and apparel retailer had no company-specific news, so it looks like the stock moved because of high short interest and broad market declines this week. As of the market close on Thursday, the stock is down 10.2% since last Friday's close.
So what
Stitch Fix didn't announce any business updates this week, so it looks like we can chalk up these price declines to stock market developments. Stitch Fix has a high short interest, estimated at 24%, meaning that a lot of its shares are sold short by short sellers. When short sellers are forced or choose to buy back shares and cover their positions, heavily shorted stocks can move higher quickly. This is called a short squeeze and may have happened to Stitch Fix in the last month.
Shares were up around 40% at one point in the last few weeks, and the decline this week may have just been due to some short-term traders selling their positions. Whatever happened, high short interest typically leads to high levels of volatility, and Stitch Fix shareholders should expect these wild price movements to continue in the future.
Stitch Fix is in a bit of trouble as shoppers come out of their COVID-19 spending habits. Last quarter, revenue declined 8% year over year to $493 million, and management is projecting full-year revenue to drop by 13% to 15%. With the business operating at a loss right now (the company had negative $89 million in operating income over the last 12 months), Stitch Fix's financials are not in a good spot, which has investors concerned. Even with the stock rising in the past month, shares are down almost 86% in the past year.
Now what
Stitch Fix has an interesting business model with its online styling service. The company was initially profitable when it went public a few years ago. But since the pandemic, the business has failed to achieve positive operating income. It has also seen executive turnover, with founder Katrina Lake stepping down.
SFIX Operating Income (TTM) data by YCharts.
The online apparel business is a promising market, with billions of dollars spent by customers each year. But unless Stitch Fix can reverse its revenue declines and operating losses, it is probably best to avoid investing in the stock right now.
