Investors are warming back up to Stitch Fix (SFIX 0.47%) in 2023. The e-commerce apparel seller's shares beat the broader market for most of the past year, even though the company is reeling from a shrinking user base and continued net losses.
Wall Street seems to be attracted to the stock's low valuation, which is only a tiny fraction of the peak valuation that investors paid during the pandemic. However, there are some important things they should know before deciding to buy into this rebound story.
Let's look at three of the biggest caution signs around Stitch Fix stock.
1. Stitch Fix is playing defense
Stitch Fix modestly outpaced management's sales forecast last quarter, but the business is still far from growth mode. Sales fell 20% year over year to $395 million in the quarter that ran through late April thanks to the combination of a shrinking base of customers and lower average spending per client.
The short-term outlook isn't any brighter. Management forecast sales declines of between 22% and 24% in the current fiscal quarter and continued net losses ahead. Given those poor demand trends, it's no surprise that Stitch Fix is prioritizing cost cuts right now, with lower priority assigned to its growth initiatives.
"We continue to focus on delivering profitability and preserving cash flow," interim CEO Katrina Lake said in early June. Investors buying the stock now should brace for potentially several more quarters of weak sales results before sustainable growth returns.
2. Stitch Fix is managing some big financial challenges
As you might expect, Stitch Fix's demand problems are causing major financial challenges. The net loss over the last nine months expanded to $143 million from $111 million a year ago. Operating losses are growing, too.
SFIX operating margin (TTM); data by YCharts. TTM = trailing 12 months.
The risk around these losses has moderated slightly in recent months thanks to the improving economic outlook around interest rates and any potential recession on the way. The company is generating positive free cash flow and holds no debt.
Yet Stitch Fix stock is still burdened by losses, and many investors might prefer to see a clear path toward profitability before buying the stock.
3. Stitch Fix has a new management team
Stitch Fix announced recently that Matt Baer, a former executive at Macy's, will take over as CEO later in June. This appointment injected more optimism into the stock, given the potential for more-aggressive strategic shifts around cost-cutting and new growth plans.
Stitch Fix has a smaller customer profile, to be sure, but it has a good chance to re-engage many of its lost clients. "People are looking for a better way to look and feel great," Baer said after his appointment as CEO.
On the bright side, the stock is undeniably cheap right now. Stitch Fix shares sell for less than 0.3 times annual sales, down from over 6 back in the high-growth days of the pandemic. But there are some good reasons for that discount today, including slumping growth and persistent net losses.
Ultimately, investors interested in this business should watch the stock for progress in these metrics before buying into any rebound story.
