Why Farfetch, Stitch Fix, and Signet Jewelers Rose This Week

What happened

Shares of high-end apparel stocks Farfetch (FTCH -1.02%), Stitch Fix (SFIX -2.28%), and Signet Jewelers (SIG 1.58%) rose this past week, up 11%, 10.1%, and 17.2%, respectively, through Thursday trading, according to data provided by S&P Global Market Intelligence. 

There wasn't much company-specific news for these consumer discretionary stocks this week. However, some U.S. corporate earnings, specifically in bank stocks, may have allayed some fears over U.S. consumer spending. In addition, some may have taken recent Federal Reserve official comments to suggest the Fed may curtail its interest rate hikes soon.

All three of these stocks are down heavily this year, as inflation and recession fears have taken their toll. Stitch Fix and Signet in particular had significant short interest in their stocks, which may have led to a bit of short covering on the better-than-feared earnings and Fed comments.

So what

Each of these retailers and platforms caters to customers making big-ticket purchases. Farfetch is an international e-commerce platform for luxury goods, Stitch Fix is a fashion e-commerce platform that uses data science to select clothing for people, and Signet is a jewelry retailer.

These companies were all down significantly this year, with Farfetch and Stitch Fix down 75% and 79% respectively, while the profitable Signet is only down 23%, but still more than the S&P 500. Stitch Fix and Signet also had more than 10% of their shares sold short entering the week.

Farfetch has been hurt by the Russia-Ukraine war, as Russia was a large market, and China's lockdowns caused another downturn in another big market. Stitch Fix has encountered a number of problems coming out of the pandemic, as people are spending less on clothes and consumer budgets are squeezed by inflation.

Again, there wasn't much in the way of company-specific news that drove these stocks. One factor could be some speculation that the Federal Reserve may slow down its pace of interest rate hikes after the November meeting. That's far from assured, but since so many of these e-commerce names are down so much on the year, short-sellers may have covered their bets in case of upcoming good news, causing these stocks to rise. 

Perhaps also helping Farfetch was the third-quarter sales release from Hermes, the maker of Birkin luxury handbags, which was released late last week. Despite a difficult macroeconomic and geopolitical backdrop, Hermes managed to grow revenue 30% in the third quarter, or 24% in constant currency. That may have reassured investors that at least the luxury consumer is powering through this economic downturn, even if the general consumer may be pulling back on goods purchases.

Now what

Despite the rise this week, it's hard to know if this marks a sustainable bottom or just a short-term bounce. After all, it's still an open debate how much of the Fed's rate increases are yet to flow through to the economy and if there will be a recession. And most of these stocks' rise came before the disappointing earnings from big tech companies later in the week.  

Of the three, should the luxury high-end remain resilient, Farfetch looks like the best bounce-back candidate here, as it still forecasts modestly positive growth, even if that growth is likely to be down from last year's rates. That's much better than Stitch Fix's ugly 15% revenue decline last quarter.

Meanwhile, Signet is down relatively less because it's a mature and profitable company with a modest dividend yield, and its valuation looks cheap at just 8.9 times earnings. However, Signet also showed a slight revenue decline last quarter, even with the acquisition of online platform Blue Nile. Same-store sales were down 8.2% and earnings were down just over 25%.

It seems consumer goods businesses could remain weak for the foreseeable future, as inflation-pinched consumers continue to shift spending to travel and services; however, it appears the luxury consumer is still spending on goods. So despite the good week, Farfetch is the only stock I would consider, even at these beaten-down levels.