Investors are avoiding Stitch Fix (SFIX -4.44%) stock like the plague. The e-commerce specialist's shares are down over 70% this year, in fact.
Sure, a lot of that slump can be blamed on factors outside of Stitch Fix's control, like inflation and a slowing economy. But the company also brought on some pressures itself, including a confusing rollout of its direct-buy functionality.
With that big picture in mind, let's look at a reason to like this stock, and one reason to stay away for now -- and ahead of Stitch Fix's upcoming earnings report.
The green flag: Management is focused
Nothing focuses a management team quite like a crisis, and Stitch Fix is taking advantage of that clarity. The company is slashing costs, reorganizing its sales process, and quickly making the type of changes to its organization that might take years under less dire circumstances. "We are moving forward deliberately and thoughtfully with a sense of urgency," CEO Elizabeth Spaulding said back in June.
That urgency should deliver immediate financial benefits in the earnings report slated for Tuesday, Sept. 20. Look for its net losses to moderate, and for Stitch Fix to potentially report an end to the market-share slide that's had investors so worried about its long-term outlook.
The new, direct-buy functionality is resonating with users, and so is Stitch Fix's core subscription-based service. If the company can find a better way to market those options, then it might quickly return to user growth, with improving earnings to follow.
The red flag: Client losses
No amount of cost-cutting will save the business if Stitch Fix can't get back to sales growth. And trends appear to be moving in the opposite direction. Executives predicted that revenue will decline by as much as 15% in the current quarter after falling 8% in the fiscal third quarter.
The good news is that Stitch Fix's customers are spending more on the service, thanks to the combination of rising prices and additional merchandise orders. But it lost 200,000 active clients last quarter, or 5% of its base. Compare that drop to its 11% gain in Q1 and its 4% gain in Q2, and you can see a distressing trend building up.
Management has blamed some of this slump on generally weakening economic trends, inflation, and supply chain issues. There's a big piece that's totally within Stitch Fix's control, too, and that's the drop in perceived value of some of its services. The company isn't signing up new customers as easily as it was, in part because shoppers are confused about how the direct-buy function fits in with its subscription-type platform.
Why watch the stock
Solving that core problem would lay the groundwork for much better sales and earnings trends in the new fiscal year ahead. But investors shouldn't expect to see quick progress there. Stitch Fix has been working on its marketing challenges for several quarters, after all, with little to show for those efforts today.
As a result, investors would be better off watching this stock from the sidelines, at least for a few more quarterly updates. Stitch Fix faced a big rebound challenge in early 2022, and that challenge has only grown along with the potential for a recession over the past few months.
