Stitch Fix Stock Pops 28% on Earnings Beat -- but Key Customer Metrics Continue to Drop

Shares of Stitch Fix (SFIX -2.00%) surged 28% on Wednesday following the online personalized-apparel retailer's Tuesday-afternoon release of its report for the third quarter of fiscal 2023 (ended April 29).

The stock's gain is probably attributable to investors -- or more likely, short-term traders -- primarily focusing on the quarter's revenue and earnings surpassing Wall Street's estimates. Indeed, they did, though both results were bad -- just not as bad as analysts had expected. 

The company's two key customer metrics continued to decline year over year. They also fell sequentially. Given these downward trending metrics, it perhaps wasn't surprising that management's revenue guidance for fiscal Q4 was lighter than Wall Street had been projecting.

Here's an overview of Stitch Fix's fiscal Q3 and its outlook, centered around six key metrics.

1. Revenue declined by 20%

In the fiscal third quarter, which ended April 29, net sales fell 20% year over year to $394.9 million, which slightly topped the 21% decline Wall Street had expected. The result also came in at the high end of the company's own guidance range.

2. Active clients fell 11% year over year

Data source: Stitch Fix. *The company considers an active client to be any customer who has bought at least one item in the past 52 weeks. YOY = year over year. QOQ = quarter over quarter.

For context, in fiscal Q2, net revenue decreased 20% year over year to $412.1 million. This decline was driven by the number of active clients dropping 11% to 3,574,000, and revenue per active client decreasing 6% to $516. 

3. Operating loss was $24.7 million 

Stitch Fix's quarterly operating loss was $24.7 million, which was 68% narrower than the operating loss of $76.9 million in the prior-year period.

4. Loss per share narrowed by 74%

The company's quarterly net loss was $21.8 million, or $0.19 per share, compared to a net loss of $78 million, or $0.72 per share, in the year-ago period. Excluding restructuring charges, the quarter's net loss would have been $0.17 per share. 

Wall Street was looking for a loss of $0.30 per share, so the company comfortably exceeded this expectation. The better-than-projected bottom line was due to Stitch Fix's cost-savings initiatives.

In January, the company announced it was closing its Salt Lake City distribution center and laying off 20% of its salaried employees. And on Tuesday, the company announced additional cost-savings measures, including plans to close its distribution centers in the Bethlehem, Pennsylvania, area later this year and in Dallas next calendar year. 

Increasing efficiency is usually a positive, but there is only so far a company can improve its bottom line by cutting costs. Over the long term, a company needs to grow revenue in order to deliver sustainable and increasing profitability.

5. Free cash flow flipped to positive from negative in the year-ago period

In its fiscal Q3, Stitch Fix generated $25.6 million in cash running its operations, and its free cash flow was $21.9 million. Those were improvements from the prior-year period, when it used $30.5 million in cash running its operations, and it had a negative free cash flow of $38.3 million. The improvements in cash flows were driven by the company's cost-cutting initiatives.

Stitch Fix remains in solid shape from a liquidity standpoint. It ended the quarter with $244 million in cash, cash equivalents, and short-term investments. 

6. Fiscal Q4 revenue is expected to decline by 24% to 22%

For fiscal Q4 (which ends July 29), management guided for revenue in the range of $365 million to $375 million. That would amount to a drop of 24% to 22% year over year. Going into the report, Wall Street had been modeling for fiscal Q4 revenue of $379.4 million, so the company's outlook was lighter than the analysts' consensus expectation. 

Also for fiscal Q4, the company guided for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $0 to $10 million, which would represent a 0% to approximately 3% adjusted EBITDA margin based on the revenue outlook. 

Continue to pass on Stitch Fix stock, but explore these two top growth stocks

Stitch Fix stock looks cheap using a conventional valuation metric, such as price-to-sales ratio. However, it's likely a value trap, not an attractive value stock, in my view. Granted, the company was profitable in its early years, but it has not proven that it can scale up -- meaning significantly increase revenue -- and remain profitable.

I believe the main issue is that only a quite limited percentage of the apparel-buying population is interested in having a box containing apparel and accessories -- a "Fix" -- that they did not choose themselves sent to them on a regular basis, or even just occasionally. On the profitability side, one key issue is that employing human "stylists" to choose -- with the aid of artificial intelligence (AI) -- customers' Fix items is not an insignificant expense. 

Long-term investors looking for a great growth stock need look no further than athletic apparel specialist Lululemon (LULU -1.10%) or tech giant Nvidia (NVDA 4.15%). Granted, both stocks are pricey using most conventional valuation metrics, but these two companies have fantastic long-term growth potential.

Here's my take on Lululemon's fiscal Q1 2023 results, released last week: Lululemon Stock Pops 13% as Earnings Sprint by Estimates and Annual Guidance Is Raised

And here's my take on Nvidia's fiscal Q1 2024 results, released in late May: Nvidia Stock Soars 25% as AI-Powered Guidance Demolishes Estimates