Summary
- The management team at Stitch Fix is expected to report financial results covering the second quarter of the company's 2023 fiscal year soon.
- Heading into earnings, analysts seem quite bearish, but so does management.
- Investors need to pay attention not only to headline news but also to the firm's deteriorating cash position.
- A cautious approach to the company during this time may not be a bad idea, though it may offer a nice upside if signs of a turnaround emerge.
On Tuesday, March 7, after the market closes, the management team at Stitch Fix ( SFIX ) is expected to announce financial results covering the second quarter of the company's 2023 fiscal year. This enterprise is a rather interesting one because, in essence, it's an alternative retailer of sorts. In short, the company operates as a web-based retailer that connects users with clothing, shoes, accessories, and more. Utilizing its subscription, consumers can receive regular orders that they can choose to keep some or all of. What they don't want, they can send back. They can also buy specific articles of clothing directly from the business. Financially speaking, the picture for the business has been under pressure as of late.
Management has reported a decline in the number of active clients using the firm's services. Sales and profits have, in turn, taken a beating. Even so, Stitch Fix's stock has risen significantly over the past couple of months. But as with any company, this picture can change suddenly. And what better opportunity for change to occur than when management reports financial results and details expectations for the near term. Personally, I do believe that investors would be wise to take a cautious approach to the stock leading up to the earnings release. Although the firm is not at risk of bankruptcy in the foreseeable future, its financial condition is worsening and we have yet to see a real turnaround in operations.
Tough times
In early December of 2022, I wrote an article discussing the financial results that Stitch Fix reported for the first quarter of its 2023 fiscal year. In that article, I talked about how the company missed expectations on both its top and bottom lines. That underscored exactly how much pain the firm was experiencing. Of course, not everything was bad. There were some bright spots for the company. In addition to that, I recognized that a return to normalcy, if it ever does come to pass, could result in some attractive upside for investors. All things considered, I believed the company to be a fairly risky play that warranted a 'hold' rating. Since then, shares have significantly exceeded my expectations. While the S&P 500 is up 0.5%, shares of Stitch Fix have soared by 27.2%.
Interestingly, no real data has come out since then that would push the stock up. Instead, the move higher seems to be driven by three different factors. The first and most obvious is the fact that the market likely overreacted to a downgrade of the firm by JPMorgan Chase ( JPM ) following the first quarter earnings report. In essence, the snapback higher was because of the market's subsequent realization that the stock probably should not have fallen quite as much as it did. Second, the company did announce , in early January, that its CEO is stepping down and that it was slashing 20% of its salaried workforce. A change in leadership for a struggling firm, combined with cost-cutting initiatives, is almost always viewed in a bullish way by the investment community. And the third factor likely relates to expectations when it comes to the second quarter of the company's 2023 fiscal year.
Given how recent the change in leadership is and how recent the cost-cutting initiatives are, it's very unlikely that the company will see any significant impact on its top or bottom line when it reports financial results for the second quarter. However, there could very well be some path forward that management lays out as to what to expect moving forward. That alone would be an important thing for investors to look at when the company reports in the coming days. There's also the possibility that the number of subscribers the business reports will come in higher than what we saw one quarter earlier. But that would be more of a speculative expectation than one based in fact.
Moving to the numbers, analysts have provided some guidance . The current expectation is for the company to report revenue of roughly $412.9 million. This represents a significant decline compared to the $516.7 million the company reported in the second quarter of its 2022 fiscal year. While this is definitely bearish in and of itself, it's possible that the company will exceed these expectations. I say this because, when the company last announced financial results, they forecasted sales for the quarter of between $410 million and $420 million.
On the bottom line, analysts currently think that the company will generate a loss of $0.33 per share. That stacks up against the $0.28 per share loss the company reported at the same time last year. In absolute dollar terms, the loss for the company in the second quarter of last year came in at $30.9 million. Management has not provided any guidance on this front. But they did say that EBITDA should range between negative $5 million and positive $5 million. That would be down from the $10.1 million the company reported in the second quarter of 2022. Analysts have not revealed any estimates when it comes to operating cash flow. But for context, this very important metric, perhaps the most important financial metric, came in negative to the tune of $16.8 million in the second quarter of 2022. If we adjust for changes in working capital, however, it would have been positive to the tune of $14.7 million. Based on the other data that we are looking at right now, it wouldn't be a surprise if these worsen year over year as well.
Another thing that investors would be wise to pay attention to involves the company's cash position. Historically speaking , the company has not had any debt on its books. That makes the probability of bankruptcy, absent something unexpected like fraud, virtually impossible in the near term. But we do know that the negative cash flows the company has been hit with have ultimately led to a significant decline in the excess cash on the firm's books. If we add in long-term investments to the equation, the company went from having cash in excess of debt totaling $400.5 million in the first quarter of the 2022 fiscal year to having this come in at only $208.8 million. Given the firm's size, this is still a tremendous amount of cash for shareholders to enjoy. But to see this number continue to worsen would be problematic.
Normally in situations like this, I would be quite bearish. However, it is also true that the company does look very cheap if we assume an eventual return to normalcy. For instance, using data from the 2021 fiscal year, the company today would be trading at a price to adjusted operating cash flow multiple of 4.0, while the EV to EBITDA multiple would come in at 4.6. These are both incredibly low trading multiples, especially if the company can eventually return to growth.
Takeaway
As we near the earnings release for Stitch Fix, I do think investors should pay careful attention to a number of things. They should look for any significant changes revealed by management that could have a positive or negative impact on the future. They should obviously be looking at things like revenue, profits, and cash flows. But they should also be paying attention to some of the balance sheet data reported by management to see whether the downward spiral in excess cash continues. This is vitally important, not only because it could indicate future pain ahead, but also because any sign that the company is truly recovering could result in shares of the business rising materially. Given this tightrope walk the company has to navigate, I do still believe that the firm carries with it a good deal of risk. But for those who are comfortable with stomaching that risk, a meaningful improvement in financial performance could lead to some great returns.
For further details see:
Stitch Fix Q2 2023 Earnings Preview: What To Keep An Eye Out For