What happened
Shares of Stitch Fix (SFIX -1.79%) tumbled as much as 23.2% this week, according to data from S&P Global Market Intelligence. The online styling and fashion website didn't release any company-specific news but is likely getting hurt by high short interest and worrying trends in the apparel space in late 2022. As of 1:05 p.m. EST on Friday, Nov. 18, shares are down 21.2% this week.
So what
Stitch Fix is an online styling service that helps people discover new clothes and fashion items to wear. It gained major traction as a start-up a decade ago but has struggled mightily since hitting the public markets, with shares down 75% since going public in 2018. Investors are worried about the deteriorating fundamentals of the business. Revenue declined 16% year over year last quarter to $482 million, with operating loss hitting $98.6 million.
On top of this, industry analysts are expecting fashion spending to decline in late 2022 due to high inflation and a potential recession induced by the Federal Reserve raising interest rates. Fashion items are consumer discretionary items and usually get hit during economic downturns unless they're sold to clients who can afford them. Stitch Fix, which does not trade in luxury items, could get hit hard by any recession.
With a 16% decline in revenue, Stitch Fix is already doing poorly, so investors are probably nervous things could get worse in the coming quarters. And since the business is already unprofitable, earnings could get ugly in 2023.
Now what
As of its last quarterly update, Stitch Fix only had a tad over $200 million in cash on its balance sheet. Over the last 12 months, the company was cash flow positive (just slightly), so there shouldn't be any concerns about it going out of business in the short run. However, if revenue continues to decline, it is likely the business will start burning cash within the next few quarters. Of course, the company could pull back on expenses and lay off some employees to plug this hole, but that could lead to even more revenue declines.
Even though the stock is down big this week and 88% over the past year, it is best to avoid buying shares of Stitch Fix. The business is just not in good shape at the moment.
