A month has gone by since the last earnings report for Stitch Fix (SFIX - Free Report) . Shares have lost about 15.9% 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 its most recent earnings report in order to get a better handle on the important drivers.
Stitch Fix Posts Q2 Earnings Beat
Stitch Fix posted better-than-expected results for second-quarter fiscal 2020. We note that the bottom line deteriorated year over year and the top line missed the Zacks Consensus Estimate.
During the reported quarter, the company witnessed heightened promotional activity in retail. This resulted in lower order values than originally anticipated. Although management expects customer acquisition cost in the back half of the year to remain almost flat year over year, costs are increasing in certain key digital channels. Moreover, concerns related to Brexit have been resulting in lower-than-anticipated revenues at the company’s U.K. business.
Consequently, it now projects net revenues of $1.81-$1.84 billion, suggesting a year-over-year increase of 15-17%. Adjusting the impact of the 53rd week last fiscal, the anticipated range suggests 17-19% growth on a 52-week comparable basis. Earlier, it expected the metric in the range of $1.9-$1.93 billion, suggesting improvement of 20-22.5% from last fiscal.
Moreover, adjusted EBITDA is guided in the band of $0-$10 million, while adjusted EBITDA, excluding SBC, is estimated between $75 million and $85 million. Stitch Fix expected adjusted EBITDA of $18-$32 million previously.
Q2 in Detail
Stitch Fix reported earnings of 11 cents that outpaced the Zacks Consensus Estimate of 6 cents but fell 8.3% from the prior-year quarter. An increase in cost of goods sold and higher SG&A expenses might have resulted in the year-over-year decline in its bottom line.
Meanwhile, the company recorded net revenues of $451.8 million, calling for 22% growth year over year. However, the reported figure slightly lagged the Zacks Consensus Estimate of $453 million.
Stitch Fix now has 3.5 million active clients, up 17% from the prior-year period. Also, revenues per active client rose 8% year over year to $501, recording the seventh successive quarter of growth. Moreover, its direct-buy initiative, wherein customers can directly select and buy items from the company’s website or app, is performing well.
In the fiscal second quarter, gross profit increased about 24% to $202.2 million, while gross margin expanded 70 basis points (bps) to 44.8%. Gross margin expansion was driven by lower merchandise costs and improved operational efficiencies, partly offset by higher shipping costs.
Stitch Fix’s operating income was $8.5 million, down from $15.4 million reported in the year-ago period. Its SG&A expenses rose 31.1% to $193.7 million. As a percentage of sales, SG&A expenses increased 300 bps to 42.9%.
Adjusted EBITDA excluding stock-based compensation expenses increased 10.3% to $30.1 million in the said quarter.
Other Financial Aspects
The company ended the quarter with cash and cash equivalents of $166 million, and shareholders’ equity of $438.9 million.
Further, the company generated $38.2 million cash from operating activities during the first six months of fiscal 2020. Also, it generated free cash flow of approximately $26.8 million in the same period. Free cash flow is expected to remain positive in fiscal 2020.
Management expects spending between $100 million and $110 million for fiscal 2020. It forecasts stock-based compensation of $75 million for fiscal 2020, of which $28 million was spent in the first half.
For third-quarter fiscal 2020, management expects net revenues of $465-$475 million, indicating growth of 14-16% year over year. This will be backed by strength in revenue per client growth and rise in active clients.
The company expects adjusted EBITDA in the range of negative $10 million to negative $4 million. Adjusted EBITDA, excluding SBC, is estimated between $13 million and $19 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -246.67% due to these changes.
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. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
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.