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Stitch Fix Plunges 37% on Sales Lag, Earnings Beat Estimates

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Shares of Stitch Fix, Inc. (SFIX - Free Report) went down roughly more than 37%, following the announcement of fourth-quarter fiscal 2018 results on Oct 1. This can be attributed to dismal top-line results and lower than expected active client numbers. 
 
As a result, shares of this Zacks Rank #3 (Hold) company to further decline 37.3% in the past three months compared with the industry’s growth of 6.3%.
 
 
 
Results in Detail
 
The company reported adjusted earnings of 17 cents per share in the fourth quarter as compared to a loss of 4 cents in the prior-year quarter. Also, it surpassed the Zacks Consensus Estimate of earnings of 4 cents. 
 
Meanwhile, sales came in at $318.3 million reflecting a 23% rise year over year, backed by increase in both women’s and men’s active clients. However, the figure missed the Zacks Consensus Estimate of $319 million.
 
The quarter marked the launch of Stitch Fix Kids along with strategies like innovation of core products and introduction of new services, including Style Pass and Extras, in a bid to enhance customer’s shopping experience. Of these, Style Pass, which was launched in December 2017, saw nearly 60% client growth on a sequential basis.
 
During the quarter, gross profit increased 26% to $141.4 million, while gross margin expanded 90 basis points (bps) to 44.4% in the reported quarter. Gross margin expansion was driven by inventory reduction, decreased clearance cost and reduction in shrink on account of initiatives undertaken by the company to strengthen its operations and inventory management. 
 
Operating earnings surged to $8.1 million, with operating margin expansion of 243 bps to 2.5% for the quarter under review.  Selling, general & administrative (SG&A) expenses jumped 19% to $133.3 million. The company also witnessed a rise in SG&A expenses, as a percentage of sales improved 140 bps to 32.8% (excluding advertising). 
 
Stitch Fix, Inc. Price, Consensus and EPS Surprise
The company ended the reported quarter with cash and cash equivalents of $297.5 million and shareholders’ equity of $315.1 million. Management incurred capital expenditures of approximately $4.5 million during the quarter. Also, the company’s operating free cash flow increased 158.8% to approximately $55.6 million.
 
Guidance
 
Management issued guidance for both first-quarter and fiscal 2019. The company expects net sales to be in the range of $345-$360 million, up 20-22% from the prior-year period. Adjusted EBITDA is anticipated to be $5-$9 million, while adjusted EBITDA margin is estimated to come in at 1.4-2.5%. 
 
For fiscal 2019, management projects net sales to be $1.47-$1.53 billion, an increase of 20-25% year over year. It also expects adjusted EBITDA of $20-$40 million along with an adjusted EBITDA margin of 1.4-2.6%. Additionally, the company estimates to incur capital expenditure, which reflects 2% of net sales in the year. 
 
Stitch Fix also announced that it will make its expansion moves in the United Kingdom by the end of fiscal 2019. 
 
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