Stitch Fix Inc (NASDAQ: SFIX) plunged more than 40% Monday night after reporting third-quarter sales guidance of $465-$475 million, far below the $506 million estimate. Full-year sales guidance between $1.81 billion and $1.84 billion — also well below market forecasts of $1.92 billion. It also slashed EBITDA guidance from $18 million to $32 million down to $0 to $10 million.
In the immediate quarter, the clothing company missed second-quarter top-line estimates but beat bottom-line projections by nearly double.
Stitch Fix had set long-term sales growth targets between 20% and 25% — a goal that Needham considers still intact.
“We view it has good momentum with women’s and its recently expanded direct buying feature should benefit conversion,” Needham analyst Rick Patel wrote in a note. “It also has ample white space opportunities through the U.K. and underpenetrated segments (men’s and kids). However, we’d like to see greater progress and consistency, particularly with new client growth which we see as being the most critical to SFIX’s growth engine.”
However, Wells Fargo is concerned that recent sales growth has not generated a corresponding rise in profits.
“While the incremental revenues have been a bullish sign that the brand was gaining momentum, the additional costs to keep the growth going (product, warehousing/distribution, and marketing) have kept a lid on profit flow-through, and EBITDA is set to decline for the 4th straight FY, while EBIT has turned negative,” analyst Ike Boruchow wrote.
Macro uncertainty may hinder its success.
“The company probably won’t be able to escape a macro environment that will likely limit consumer spending on the category in the near term,” Stifel analyst Scott Devit wrote.
“Much of SFIX’s bull-case has been tied to its ability to replicate its U.S. success overseas,” Patel wrote. “Its May 2019 expansion into the U.K. hasn’t hit SFIX’s growth targets due to Brexit and time needed to learn local-market preferences. We believe this, coupled with COVID-19 uncertainty and investments will cause the U.K. to continue being a near-term drag on EBITDA.”
Wells Fargo considers these factors risks to scalability and points to additional concerns in the greater e-commerce segment.
The SFIX Ratings
Needham expects sales per active client to increase with the application of data analytics to drive conversion and with the third-quarter expansion of Stitch Fix’s direct buying feature. However, impacts from the latter may be offset by less robust AOV growth “given competitive promos and a broader assortment of lower-priced products.”
- Needham maintained a Hold rating;
- Piper Sandler maintained a Neutral rating but cut its target from $22 to $15;
- Stifel maintained a Buy rating but cut its target from $32 to $26;
- SunTrust Robinson Humphrey maintained a Buy rating but cut its target from $38 to $27; and
- Wells Fargo maintained an Equal-Weight rating but cut its target from $29 to $14.
“We are comfortable on the sidelines given growing business complexity & rising customer acquisition costs,” Piper analyst Erinn Murphy wrote.
Stitch Fix traded lower by 26% to $15.71 per share at time of publication.