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Stitch Fix (SFIX) Shares Decline 19% Despite In-Line Q2 Loss

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Shares of Stitch Fix, Inc. (SFIX - Free Report) plunged nearly 18.9% in after-hours trading on Mar 8, following second-quarter fiscal 2022 results. SFIX reported a loss per share, which met the Zacks Consensus Estimate but deteriorated from the year-earlier quarter’s loss. However, the top line improved year over year.

Stitch Fix witnessed late receipts due to shipping delays because of the global supply-chain issues. SFIX is experiencing 4-5 weeks’ delay for most of its products. However, this is not believed to materially affect the business, given its inventory levels and mitigation efforts like earlier bookings. Soft quarterly results and a bleak view for the third quarter hurt the stock.

Shares of this currently Zacks Rank #4 (Sell) Stitch Fix have decreased 41.2% in the past six months compared with the industry’s 19.2% decline.

Q2 Details

Stitch Fix posted a loss of 28 cents a share, which matched the Zacks Consensus Estimate. This quarterly loss per share is wider than the loss of 20 cents a share recorded in the prior-year quarter.

Stitch Fix, Inc. Price, Consensus and EPS Surprise

Stitch Fix, Inc. Price, Consensus and EPS Surprise

Stitch Fix, Inc. price-consensus-eps-surprise-chart | Stitch Fix, Inc. Quote

SFIX recorded net revenues of $516.7 million, reflecting an increase of 3% from the year-ago quarter’s figure. The metric slightly came ahead of the Zacks Consensus Estimate of $516 million. Continued strength across the Kids and the UK businesses as well as expansion in the Freestyle capability fueled the top-line performance. Kids and UK businesses registered growth of 19% and 73%, respectively, year over year.

Stitch Fix registered net revenue growth of 29% year over year for Freestyle. Management witnessed higher penetration from the Fix business, increasing more than 32% of SFIX’s women’s Fix clients purchasing via Freestyle.

Stitch Fix has active clients of 4,019,000 as of Jan 29, 2022, up 4% from the prior-year quarter’s level. Net revenue per active client jumped nearly 12% year over year to $549, surpassing $500 for the third consecutive time. Management has been enhancing and broadening SFIX’s personalized shopping for a while, offering via Freestyle. It is focused on catering to the consumer needs to fit and search-based shopping, highlighted by the return rates in Freestyle. Since the launch of Freestyle, stylists have created 2.5 million outfits, which is contributing to the overall sales.

Margins & Costs

In the fiscal second quarter, gross profit increased 7.6% to $232.8 million with gross margin surging 214 basis points (bps) year over year to 45.1%. Leveraged shipping costs on increased average order values and higher product margins aided the gross margin.

Selling, general and administrative (SG&A) expenses inched up 2.6% to $263.5 million. Other SG&A excluding advertising was 44.2% as a rate of sales, which increased 156 bps year over year. Growth was mainly due to elevated headcount, including headcount in SFIX’s product and tech organizations.

Stitch Fix reported an adjusted EBITDA of $10.1 million in the quarter under review against the adjusted EBITDA loss of $8.9 million reported in the year-ago quarter. This is mainly due to lower marketing spend.

Other Financial Aspects

Stitch Fix ended the quarter with cash and cash equivalents of $193.9 million minus debt and shareholders’ equity of $461.1 million.

SFIX used $27.6 million cash from operating activities during first-half fiscal 2022. Also, SFIX had a free cash flow of $94 million at the end of the first half, primarily owing to favorable working capital.

In early January, Stitch Fix’s board authorized a $150-million share repurchase program. During the reported quarter, SFIX bought back $11 million shares.

Outlook

For the third quarter of fiscal 2022, management projects net revenues of $485-500 million, indicating a 7-10% decline from the year-ago quarter’s reported figure. Stitch Fix expects adjusted EBITDA in the bracket of a negative $30 million to a negative $25 million with a 6-5% margin contraction. This represents lower new client additions during the first half of the fiscal year, inducing weaker revenues due to reduced subsequent fixes in the second half. This view assumes that net active clients will be flat to marginally down sequentially.

Given sluggish active clients in the first half coupled with volatility and the timing of improvements in conversion, management is trimming its revenue outlook for the fiscal year, issued on Dec 7, 2021. For fiscal 2022, Stitch Fix now projects revenues to remain flat to slightly down from the year-ago fiscal’s reported figure. This assumes flat active clients through the end of the fiscal year. Although SFIX has been evaluating its marketing spend for a while, it expects marketing to grow on improved conversion.

Key Picks in Retail

Some better-ranked stocks are Capri Holdings (CPRI - Free Report) , Boot Barn Holdings (BOOT - Free Report) and Tapestry (TPR - Free Report) .

Capri Holdings, which offers accessories and footwear, sports a Zacks Rank #1 (Strong Buy) at present. CPRI has an expected earnings per share (EPS) growth rate of 53.9% for three-five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Capri Holdings’ current financial-year sales and EPS suggests growth of 37.1% and 215.8%, respectively, from the year-ago period’s corresponding figures. CPRI has a trailing four-quarter earnings surprise of 1,018.2%, on average.

Boot Barn Holdings, a lifestyle retailer of western and work-related footwear, apparel and accessories, presently sports a Zacks Rank of 1. BOOT has an expected EPS growth rate of 20% for three-five years.

The Zacks Consensus Estimate for Boot Barn Holdings’ current financial-year sales and EPS suggests growth of 62.6% and 220.8%, respectively, from the year-ago period’s corresponding figures. BOOT has a trailing four-quarter earnings surprise of 47.1%, on average.

Tapestry, a renowned designer of fine accessories, presently carries a Zacks Rank #2 (Buy). TPR has a trailing four-quarter earnings surprise of 28.2%, on average.

The Zacks Consensus Estimate for Tapestry’s current-year sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the corresponding year-ago period’s levels. TPR has an expected EPS growth rate of 12.5% for three-five years.