It has been about a month since the last earnings report for Stitch Fix (SFIX Quick QuoteSFIX - Free Report) . Shares have lost about 4.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Stitch Fix due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Stitch Fix Q2 Loss Narrows, Revenues Decline Y/Y

Stitch Fix reported second-quarter fiscal 2024 results, wherein the top line missed the Zacks Consensus Estimate, but the bottom line met the same. The top line deteriorated from the year-earlier quarter’s figure. Meanwhile, the bottom line fared better year over year.

SFIX is focusing on three main areas to improve its business trajectory. These include strengthening the foundation of the business, reimagining the client experience to attract and retain high-value customers and developing a long-term strategy to adapt to evolving client needs.

SFIX plans to introduce a new onboarding experience, develop new ways to inspire and empower clients to discover their personal style and offer more personalized connections with stylists. The company has made progress in merchandising and marketing initiatives, contributing to expanding gross margins year over year and operational efficiencies.

Q2 in Detail

Stitch Fix reported an adjusted loss of 21 cents per share, in line with the Zacks Consensus Estimate. The metric narrowed from a loss of 34 cents per share reported in the year-ago quarter.

SFIX recorded net revenues of $330.4 million, which lagged the Zacks Consensus Estimate of $332 million. Also, the metric declined 18% from the year-ago quarter figure due to lower net active clients.

The number of active clients engaged in ongoing operations was 2,805,000, marking a decline of 17% year over year. The average net revenue generated per active client from ongoing operations was $515, representing a decrease of 3% from the previous year.

Margins & Costs

In the fiscal second quarter, the gross profit declined 12.4% to $143.5 million from $163.8 million reported in the year-ago period. However, the gross margin expanded 250 basis points (bps) year over year to 43.4%, supported by strong product margins, improvement in inventory health and transportation leverage.

The company’s cost of goods sold declined 21.1% from $236.9 million reported in the year-ago period to $186.9 million in the fiscal second quarter. SG&A expenses fell 20.1% from $227 million in the prior-year quarter to $181.5 million in the quarter under review. SG&A expenses, as a percentage of net revenues, were 54.9%, down 180 bps from 56.7% reported in the prior-year quarter.

Advertising expenses accounted for 7% of the revenues for the quarter, a decline of 19% from the previous quarter. This can be attributed to the typically reduced spending on advertising during the holiday season.

Stitch Fix reported an adjusted EBITDA of $4.4 million for the fiscal quarter under review compared with the adjusted EBITDA of $6.3 million posted in the year-ago fiscal quarter, reflecting its ongoing cost management discipline.

Other Financial Aspects

The company ended the fiscal second quarter with cash and cash equivalents of $227.5 million, short-term investments of $2.3 million, net inventory of $126 million and shareholders’ equity of $213.3 million. In the fiscal second quarter, the free cash flow from continuing operations was negative $26.1 million. This was due to the timing of payments for inventory purchases made in the first fiscal quarter.

Outlook

For the third quarter of fiscal 2024, management projects net revenues in the band of $300-$310 million, indicating a 19-22% decline from the year-ago fiscal quarter’s reported figure. Stitch Fix expects an adjusted EBITDA loss in the band of $0-$5 million, with a margin of 0% to 2%.

For the latter half of the year, the company anticipates an increase in the gross margin between 44% and 45%. This expected improvement is attributed to ongoing efforts to enhance its inventory management and achieve greater efficiencies in transportation costs. Additionally, advertising expenses for the fiscal third quarter are projected to constitute 8% to 9% of revenues.

For fiscal 2024, SFIX continues to project net revenues in the range of $1.29-$1.32 billion, which indicates a 17-19% decline from the year-ago fiscal quarter’s reported figure. When adjusted to a standard 52-week period, the anticipated year-over-year decrease ranges between 18% and 20%. For the fiscal year, Stitch Fix currently expects adjusted EBITDA in the range of $10-$20 million with a margin of 1% to 2%. The gross margin is likely to be approximately 44% and advertising to be approximately 8% of revenues in fiscal 2024.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -41.97% due to these changes.

VGM Scores

At this time, Stitch Fix has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Stitch Fix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.