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Stitch Fix Stock Rallies Ahead of Industry: Time to Cash In?

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In an ever-changing and competitive retail landscape, Stitch Fix, Inc. SFIX has managed to stay afloat on constant efforts to enhance the shopping experience for customers. Its direct-buy capability, which allows customers to select and buy items directly from its website or app, bodes well. In addition, the company is committed toward enhancing its personalization capabilities in modern ways, which along with the direct-buy initiative should deliver sustainable growth across its business.

Impressively, shares of this San Francisco, CA-based company have advanced 22.7% in the past three months. Also, the Zacks Rank #1 (Strong Buy) stock has surpassed the industry’s 3.6% rise.

Let’s delve deeper.

Factors Driving Stock

Speaking of growth endeavors, Stitch Fix introduced features like Shop Your Looks and Shop New Colors, which fall under its direct-buy initiative, and are likely to boost customer experience. Management has also made some changes in its website and app, which now includes a shop section. With this, Stitch Fix will utilize data based on the customers’ previous purchases and recommend similar items. The company has already started testing this new initiative, and has been receiving positive feedback.

Stitch Fix had also introduced a feature, Extras, which allows customers to add an item to the list of five items that their stylist has picked for them. The feature also offers a personal note from the stylist and a style card that provides detailed information about each item. The feature comes with a styling fee of $20 for each Fix (the list of items chosen by the stylist). Meanwhile, management continues to invest in digital offerings.

The aforementioned factors have been largely contributing to the company’s client base. Encouragingly, its active clients rose 16.6% year over year to 3.4 million in first-quarter fiscal 2020, following which net revenue per active client increased 9.5% on strength in women’s category. This marked the sixth successive quarter of revenue growth per active client. Prior to this, the metric rose 9%, 8% and 6% in the fourth, third and second quarter of fiscal 2019, respectively. Management expects continued growth in active clients and revenue per client.

In addition, categories such as women’s and men’s are performing well and contributing significantly to the company’s top line. Further, Stitch Fix is on track to build out the kids’ category. These factors will continue driving the company’s top and bottom lines. For fiscal 2020, management projects net revenue growth of 20.5-22.5% from last fiscal. The Zacks Consensus Estimate for revenue stands at $1.92 billion for the current fiscal, which implies growth of 21.5% year over year.

Wrapping Up

While all the above factors instill confidence, Stitch Fix is not immune to high SG&A costs and intense competition in the industry. The company continues to invest in capital and engineering capabilities to boost efficiency in its warehouses and styling teams. Moreover, higher investments toward technology and newer initiatives bump up costs. These expenses may eat into margins and profitability.

Nevertheless, we are encouraged by this online fashion retailer, given strength in its concerted efforts to enhance e-commerce and personalization capabilities. Notably, Stitch Fix beat estimates in each of the last four quarters, the average positive surprise being about 162%. Its long-term expected earnings growth rate of 15% is impressive.

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