Artificial intelligence (AI) stocks are all the rage now. But investors shouldn't get too caught up in the hype. There are some winners and some duds, like in every industry. Do careful research about any stock you consider without relying on short-term trends and buzzwords.
One AI stock that has investors sitting up and taking notice is personal stylist company Stitch Fix (SFIX 0.47%). After the founder-CEO returned to take the helm this year, the board announced a permanent replacement last week. Is this the right direction for Stitch Fix? How should investors view this development?
Stitch Fix needs some fixing
Stitch Fix was dreamed up by founder Katrina Lake while she was still in college. The idea behind Stitch Fix is that the company can use AI and machine learning, combined with a human touch, to figure out a client's style preferences and choose personally curated clothing pieces for each client. This sets it apart from almost any other fashion concept in stores, where a customer might get help from a salesperson or pay top dollar for a stylist, or go online for product recommendations based on past purchases or search history.
The concept has been successful, and like many online retailers, Stitch Fix exploded at the beginning of the pandemic. However, those circumstances have changed. And worse than for many other retailers, the company's sales declines have been severe; it's losing customers; and profitability has tanked.
In the 2023 fiscal third quarter (ended April 29), sales fell 20% year over year after declining 8% last year. For some perspective, they increased 44% in 2021.
Its net loss was $21.8 million, continuing a string of losses. Stitch Fix posted several profitable quarters during the pandemic.
Probably the worst news was that active customers declined by 11%, or by 431,000 customers, to about 3.5 million.
Is differentiation always a benefit?
This leads to investors questioning whether or not Stitch Fix's entire model is sustainable. There just might not be enough demand for this kind of platform.
Lake left the company as soon as it began to show signs of pressure, but the situation only worsened under the management of her replacement. This next change could prove a make-or-break moment for Stitch Fix.
The newest CEO, who takes over this week, is Matt Baer, who comes from Macy's, where he was the chief customer and digital officer. In that capacity, he was responsible for the entire digital enterprise, including a website redesign and launch of a third-party marketplace. He was also responsible for the development of programs that enhanced the company's relationships with its clients, including creating new style teams. These functions have set him up for what needs to be done at Stitch Fix.
Typically, new CEO announcements are welcomed by investors. Not in this case. Stitch Fix stock is down around 14% since the announcement. However, it's still up roughly 20% in 2023.
Why are investors sour? Although Baer looks like he could be the right candidate, he might come from too much of the same retail mold from which Stitch Fix needs to break free. Stitch Fix is conceptually different from other retailers, and it might need a fresh eye to set things right and get the most out of the model. I0n other words, someone like Katrina Lake.
However, right now, it needs someone to stabilize operations and get the company back on track by increasing sales and becoming more efficient, which any retailer, whether typical or not, needs. Baer might be able to make that happen. If so, then the company can move forward with its differentiation.
Can AI save the day?
As much as Stitch Fix has been struggling, it might be on the cusp of a rebound. First of all, despite the gloomy third-quarter results, there were some upbeat notes. Its net loss was much improved from $78 million last year, and sales, as much as they fell, exceeded guidance. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also came in higher than expected. Even better, it generated $22 million in free cash flow, and it has posted several quarters with positive free cash flow, although not consecutively.
Second, AI has significantly impacted business over the past few months since OpenAI launched ChatGPT. The retail scene may just be starting to appreciate what it can do with AI, and Stitch Fix, with its built-in AI model, is poised to benefit. It might take a few quarters, but a turnaround could be happening soon.
Does that mean it's time to buy Stitch Fix stock?
It's still too early to say with any confidence that Stitch Fix will bounce back. There are enough signs that a risk-tolerant investor, especially one who is familiar with Stitch Fix's services and sees how they can transform fashion, might want to take a small position.
But most investors should watch right now. The stock is super cheap, trading at only 0.3 times trailing-12-month sales. Should performance improve, you want to be ready to buy while it's still an opportunity.
