2023-06-06 18:00:52 ET
Summary
- Stitch Fix, Inc. beat expectations in FQ3 and provided positive guidance for future revenues, leading to a rise in its share price.
- Concerns exist regarding Stitch Fix's viability and future prospects, as revenue growth rates have been declining and the number of active clients decreased.
- Despite improved free cash flow, I'm not convinced that investing in Stitch Fix is compelling.
Investment Thesis
Stitch Fix, Inc. ( SFIX ) beat on the top line for its fiscal Q3 2023 and guided for better-than-expected revenues for the quarter ahead. This led its share price to soar after hours, and it's up more than 5% at the time of writing.
In my previous analysis, I made the case that I was neutral on this name . Today, I reiterate my stance. An investment in Stitch Fix, Inc. will require a lot more than 1 good quarter.
That being said, I believe that this quarter was substantially better than many expected. Myself included.
Why Stitch Fix? Why Now?
Stitch Fix is an online personal styling service. It provides customers with a personalized ''Fix'' based on an algorithm that generates recommendations. Stitch Fix has two main channels: delivering a personalized shipment of items (called a "Fix") or purchasing directly from their website or mobile app (called "Freestyle").
Further, Stitch Fix declares that their data insights allow them to analyze client data and key merchandise information to enhance the quality of the client's personalization.
This latest set of results marks approximately 6 months since SFIX's Founder Katrina Lake returns to take the reigns as interim CEO. And since Lake returned, I believe she can be proud of the work she's put in to stem SFIX's operation.
That being said, in my previous analysis , I put forth this assertion:
[...] the bears question the viability, self-sustainability (meaning its ability to self-fund), and future prospects of the business.
I don't know at this juncture which side carries the most weight. But what I do know is that SFIX stock is already 15% shorted. And I can't imagine that there is substantially more upside for the shorts.
Since I wrote that paragraph, we can see that Stitch Fix's ''days to cover'' short ratio has increased to just above 5. Therefore, I maintain, that Stitch Fix is becoming a very crowded short.
Moreover, in my previous analysis, I said,
If you've followed my work before, you'll have seen me say, follow the customer. The customer knows best and provides the most indicative and unbiased allure of the platform.
Case in point, for fiscal Q3 2023 , active clients decreased by 11% y/y to 3.5 million. Fundamentally, even if Lake can make the case that without her at the helm Stitch Fix would be in worse shape, I'm not sure that the business is exactly thriving right now, either.
Revenue Growth Rates Continue to Slide
Indeed, as alluded to throughout, Stitch Fix's revenue growth rates are leaving a lot to be desired.
Even though fiscal Q4 2023 was up against very easy comparables with the prior year, Stitch Fix's guidance points to around negative 20% y/y revenue growth rates.
Is there anything in the above chart that reflects a ''viable'' business? I'm not convinced.
Up until now, I've only remarked on the overarching negative elements facing Stitch Fix. Next, we'll talk about the bull case.
The Bull Case For Stitch Fix: Free Cash Flows Jump Higher
Let's get some context. What you see below is Stitch Fix's fiscal 2023 guidance provided back in fiscal Q1 2023.
At the midpoint, investors could expect Stitch to report breakeven EBITDA. Then, the following quarter, Stitch Fix upwards revised its full year EBITDA profile.
As of fiscal Q2 2023, Stitch Fix's midpoint EBITDA pointed to around $5 million. And now?
Including its fiscal Q4 2023 guidance at the midpoint of $8 million, this could mean that Stitch Fix's adjusted EBITDA will be up higher than $10 million in fiscal 2023. Clearly, this is positive.
And now, consider this:
Furthermore, what you see above is that Stitch Fix's free cash flow profile has jumped significantly y/y by close to $60 million. Whereas this was previously a free cash flow burning business, it is now significantly more than ''just free cash flow breakeven.''
As we stand right now, more than 50% of Stitch Fix's market cap is made up of cash. And the business is debt free, too.
The Bottom Line
Stitch Fix, Inc. recently reported better-than-expected revenues and provided positive guidance for the upcoming quarter, causing its share price to rise.
While this quarter exceeded my expectations, I still have concerns over Stitch Fix, Inc.'s viability and future prospects. Stitch Fix's revenue growth rates have been declining, and although the business has shown improved free cash flow, I'm not sold that this is a compelling investment.
For further details see:
Stitch Fix: Better-Than-Expected Guidance, But There's More