Online personal styling service Stitch Fix (NASDAQ:SFIX) has encountered turbulent times post-pandemic. After announcing disappointing quarterly earnings, SFIX stock has shed roughly 23%, pushing it into value territory. While strategic initiatives to rebuild its profitability hold significant promise, a wait-and-see approach might be a better course for investors.
A Stitch in Time
Stitch Fix’s proprietary shipment service, “Fix,” offers merchandise personalized for the shopper based on a comprehensive analysis of client preference, budget, and data-driven algorithms.
The shift in post-pandemic spending patterns has been tough on the company, and it has experienced significant challenges to its business model in the wake of changing consumer behavior and market dynamics. The company’s active client base has shrunk by 33% from the peak in 2022, with 2.8 million users purchasing a “Fix” in the past year.
As the company battles new competitors like Urban Outfitters’ (NASDAQ:URBN) Nuuly and Armoire and the growing popularity of pre-owned platforms like Etsy’s (NASDAQ:ETSY) Depop and ThredUp (NASDAQ:TDUP), it has been working hard to overhaul its operations to return to profitability. This has involved hiring a new CEO, staff reductions, shutting down the UK operations, and closing two fulfillment centers.
Financial Results and Outlook
Stitch Fix recently reported second-quarter results that fell short of analysts’ expectations, leading to a 23% drop in shares in the following days. While the revenue of $330.4 million (an 18% year-over-year decline) was in line with analysts’ expectations, the EPS of -$0.30 was worse than the consensus estimate of -$0.22 per share.
This disappointing performance has been mainly due to the year-over-year decline in active clients and weaker-than-expected revenue per active client.
Further intensifying concerns, Stitch Fix adjusted its full-year revenue and EBITDA guidance downward. Originally projected to achieve revenue in the range of $1.3 billion to $1.37 billion, the company now expects the top line between $1.29 billion and $1.32 billion. The company’s adjusted EBITDA has also been revised downwards, with a new projected range of $10 million to $20 million, as opposed to the previous expectation of $10 million to $30 million.
Where the Stock Stands Now
SFIX is down over 29% since the beginning of the year. At $2.51 per share, it is trading at the bottom of its 52-week range of $2.35-$5.48. It is below the 20-day (3.07) and 50-day (3.29) moving averages, demonstrating ongoing negative price momentum.
However, from a valuation perspective, the downward movement in price has pushed the stock into value territory. Price-to-sales, an appropriate ratio for relative analysis as SFIX is unprofitable, currently stands at 0.2x, well below the Consumer Cyclical sector average of 1.3x and the Apparel Retail industry average of 2.1x.
The risk of buying a value stock is that it can always get cheaper, and the trend of negative price momentum suggests it might. Yet, the reading of the Relative Strength Index (RSI 14) of 31.24 indicates that the stock is heading into oversold territory and an entry point may be near for value investors looking for a break in the downward trend.
Is SFIX a Buy, Hold, or Sell?
Analysts covering the stock have cautioned that a wait-and-see approach is warranted until positive top-line growth becomes more apparent. Bernstein analyst Aneesha Sherman recently lowered the firm’s price target to $3.50 from $4. She maintained a Hold rating on the shares, suggesting Stitch Fix is still several quarters away from positive growth.
SFIX is currently listed as a Hold based on seven analysts’ stock ratings in the past three months. The average Stitch Fix price target of $3.31 represents an upside potential of 31.87% from the current levels.
Closing Thoughts
Stitch Fix is reinventing itself to navigate the new post-pandemic landscape. Hiring a new CEO, reducing staff, and closing facilities signify an aggressive approach to return to profitability, though that may still be a way off. The stock is currently in value territory, which presents a potential opportunity for value investors. However, given the stock’s recent performance and analysts’ cautious outlook, it may be prudent to adopt a wait-and-see approach until signs of sustainable positive growth become more evident.
