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Stitch Fix Earnings Reflect Both Bulls & Bears

Shares of Stitch Fix, Inc. (SFIX), an online personal styling service company, have performed well and gained 55% over the past year.

The momentum has continued. Since the company’s earnings announcement on September 21, the stock has increased almost 15% to close at $41.01 per share on Wednesday.

With the launch of Stitch Fix Freestyle, higher-than-expected revenues, and increased product margins, the company’s earnings remained impressive. However, management’s lackluster forward outlook and rising inventory levels remained key concerns.

Thus, I am Neutral on Stitch Fix stock. (See Stitch Fix Dividend Date and History on TipRanks)

So, Let’s Review the Results

Solid demand for the company’s online styling services led to strong fourth-quarter results.

Stitch Fix’s sales increased 29% year-over-year to $571.2 million. The top-line success was powered by continued strength in Women’s Fix, Kids, and U.K., and progress in the Freestyle channel.

Key indicators that include the number of active clients and revenue per client both increased 18% and 4%, respectively.

Another fact worth highlighting is that, after losing money in the previous two quarters, Stitch Fix surprised investors with a profit of $0.19 per share in the fourth quarter, surpassing analysts’ forecasts of a loss of $0.13 per share.

Though the earnings numbers remain impressive, the management’s weaker-than-expected forecast may leave investors worrying.

Weak Guidance

The firm forecasted a 14% to 17% year-over-year increase in first-quarter revenues of $560-$575 million, which is lower than the average expectation of $591 million.

Furthermore, the midpoint of the projection ($567.5 million) is a drop of about 1% from the previous quarter.

Additionally, the company’s full-year sales estimate was for 15% year-over-year growth, down from 23% in fiscal 2021.

Given the tailwinds from the introduction of Freestyle and the slow reopening of the economy owing to worries from the Delta variation, the forecast seems very conservative.

Stitch Fix Freestyle – a Catalyst

Stitch Fix has been improving its customer experience with fresh upgrades, expanded product choices, and the growth of its branded stores.

In an effort to bring in more awareness about personalized shopping, the company recently launched Stitch Fix Freestyle – a progression of Stitch Fix’s direct buy initiative – which allows consumers to quickly buy products recommended for them, based on their style, fit, and budget across multiple categories, without first purchasing a Fix subscription.

Going forward, this initiative should aid the firm in acquiring more consumers. Stitch Fix Freestyle, I believe, has the potential to drive the company’s growth in the near future.

What are Analysts Saying?

The results of Stitch Fix have split experts’ perspectives. Despite the positive results, several analysts remain cautious, and just a handful have a Buy outlook on the company.

Wells Fargo analyst Ike Boruchow reiterated a Sell rating on the stock and a price target of $35.00. This implies 14.7% downside potential to current levels.

Though the four-star analyst is optimistic about the company’s future prospects, he claims that there are several overhangs to be addressed, including sluggish revenue growth forecasts for fiscal 2022, inventory concerns, lower margin visibility, and so on.

Echoing a similar sentiment, MKM Partners analyst Roxanne Meyer reiterated a Sell rating on the stock and a price target of $31.00. This implies 24.4% downside potential to current levels.

Meyer believes that the stock price surge was caused due to low expectations and negative sentiment heading into the earnings report. She is concerned about the company’s talent turnover and technical issues, as well as its techniques for managing inventory.

On a positive note, KeyBanc analyst Edward Yruma reiterated a Buy rating on the stock but decreased the price target to $70 from $75. This implies 70.7% upside potential to current levels.

The analyst expects that Stitch Fix’s Freestyle will result in a significant increase in TAM (total addressable market), as well as expanding margins. Further accelerating secular shifts as well as a near-term cyclical boost should continue to remain growth drivers.

Stitch Fix’s Freestyle, according to the analyst, will result in a considerable rise in TAM (total addressable market) as well as expanded profitability. Further accelerating secular shifts as well as a near-term cyclical boost should be growth drivers.

Overall, the stock has a Hold consensus rating, based on 4 Buys, 5 Holds, and 3 Sells.

As for price targets, the average Stitch Fix price target of $48.67 implies 18.7% upside potential to current levels.

Disclosure: On the date of publication, Shalu Saraf had no position in any of the companies discussed in this article.

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