2023-03-14 17:38:14 ET
Summary
- The good news for Stitch Fix, Inc. is that the short side may have overstayed their welcome.
- The bad news is that I don't see how the Stitch Fix business can turn a corner any time soon.
- The core of the Stitch Fix, Inc. bull case needs to be supported by an increase in active clients. So far, there's no enough evidence of this.
Investment Thesis
Stitch Fix, Inc. (SFIX) is down more than 90% from its highs. Everyone knows this. Where investors disagree on is where Stitch Fix is headed from here?
The bullish argument makes the case that SFIX stock is at all-time lows and pricing in maximum pessimism, therefore, the stock is bound to be undervalued.
On the other hand, 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.
So, I stand in the middle, with a hold position.
How Did We Get Here? Where is SFIX Headed?
Was it management's missteps that got Stitch Fix to where it is today? Or was it more the whipsaw of the economic environment, where we went from massive demand for online shopping to a more steady state normalized environment?
Or perhaps that is the wrong question? Perhaps the better from this point is to think where could SFIX go from here?
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 of the allure of the platform.
The table above shows that with the passage of time, the number of active customers is moving down. Irrespective of seasonality, this is not a high-quality business.
That's not to say that it's worthwhile shorting the stock. After all, SFIX could report a strong quarter that could negatively surprise those that are short the stock. But is that possibility enough to build a long thesis on STFIX? I don't think so.
Revenue Growth Rates Are Not Showing Much Improvement
The graphic above speaks for itself. This is a business that is seeing no underlying traction.
Again, it's not just about the tough comparables from the prior year. And it's not just the case that there's a lot of competition, with many outlets running a significantly promotional environment. And it's not only about the underlying economic environment weakening. But a combination of all three simply doesn't provide enough support for SFIX to flourish.
That being said, it's not all negative when it comes to SFIX.
Path to Profitability
Everything we've discussed is obvious to everyone involved with SFIX. After all, there's a reason why SFIX's CEO stepped down and that's because the business was in turmoil.
Consequently, with SFIX's founder now returning to the business, one hopes that SFIX's Founder and former CEO Katrina Lake will be able to stabilize SFIX's operations.
However, I don't know if SFIX has enough appeal to its platform that it can cut back on advertising, in order to improve its profitability profile and still grow its top line.
That being said, I suppose the business is in turmoil, so SFIX must do something .
And yet, recall what we've already discussed: for several quarters SFIX's active customers have been churning lower. Thus, I don't know if cutting back on advertising is really going to get customers to reengage with the brand.
Finally, allow me to highlight what SFIX said on its recent earnings call :
We will continue to responsibly manage our cost structure with the goal of staying adjusted EBITDA and free cash flow positive for the remainder of the year.
Essentially, SFIX declares that even though fiscal Q3 2023 points to breakeven EBITDA, through cost-cutting, SFIX will be able to end the year with positive free cash flow.
Clearly, very few investors today looking at SFIX have any hope that this business could indeed be run with a view toward being self-sufficient. If that did end up being the case, this stock could rapidly move higher.
The Bottom Line
I understand that part of the appeal of the bull investment thesis is that Stitch Fix, Inc. has more than $200 million of cash and no debt, meaning that more than 30% of its market cap is made up of cash.
But I'm not sure that's quite enough to get me to fully support the bull case for SFIX. That being said, if somehow Stitch Fix, Inc. is truly able to cut back on its cost structure and grow its underlying cash flows, then I would be more than willing to revisit this name and change my mind.
For further details see:
Stitch Fix: Some Positives And Negatives