In the world of retail today, there are the disruptors, and the disrupted. On Tuesday, it was particularly easy to see which was which. Stitch Fix (NASDAQ: SFIX) delivered an impressive set of quarterly results, and the market took its stock off the discount rack, pushing it 25% higher on the day. Dick's Sporting Goods (NYSE: DKS), on the other hand, reported on a period that featured falling profits, falling comps, falling revenues, and other unfortunate trends.
In this MarketFoolery podcast, host Mac Greer and senior analysts Ron Gross and Andy Cross consider the growth story of the fashion subscription business and the contraction that afflicts the niche retailer -- and they offer some useful insights for investors looking at the two. They also celebrate the 30th birthday of the World Wide Web with some reflections on their own early days in the online milieu.
A full transcript follows the video.
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This video was recorded on March 12, 2019.
Mac Greer: It's Tuesday, March 12th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, welcome! How are we doing?
Andy Cross: Hey, guys! I'm doing great!
Ron Gross: I'm good! How are you?
Greer: I'm good! I'm feeling good! I'm feeling better than Dick's Sporting Goods.
Gross: [laughs] Getting right to it!
Greer: There you go!
Gross: Segues are for kids.
Greer: [laughs] We're also going to talk about the internet celebrating a big birthday. Guys, let's begin with the world of high fashion. We're all fashionable guys.
Gross: [laughs] Yeah, OK.
Greer: OK, maybe not. But let's talk personalized apparel, let's talk Stitch Fix. Shares up more than 25% at the time of our taping on stronger than expected earnings and some upbeat guidance. Guys, Stitch Fix now has almost 3 million active clients. That's up 18% year over year. Andy and Ron, what do you think?
Cross: It was a good quarter. As you mentioned, active clients grew 18%. Revenues grew 25%. We talked about this at the YouTube Live last week. I said anything above 24% would be pretty well-received by the investors and the Street. Clearly, today, it was. Profits came in at $0.12 per share. That was more than $0.07 last quarter and far above estimates. Their guidance for the quarter was pretty good.
Overall, a pretty nice quarter for Stitch Fix. We have to remember, last quarter, they reported growth that wasn't quite as well-received, and the stock really got hit. This is a lot of rebounding off of those lows. The stock has climbed back from those lows, but this was a continuation of that. The talk and the conversation with Katrina Lake, who owns more than 13% of the company, she's the co-founder of the business, a lot of the conversation was that the year is looking pretty good and that revenue growth for the year is somewhere in that 25-26% range, which is an acceleration off the last couple of quarters. Growth picture, really pretty healthy.
The cost side is what I was watching. The sales and general administration costs really exploded during the quarter. That kept profits about flat. But investors are really much more focused on the revenue growth.
Greer: Ron, this stock is heavily shorted, meaning that there are a lot of shares that essentially were betting against the stock. When we look at a run-up like this, how much of this do we think is because the business is really improving? How much of this is people covering those short positions? People who are like, "Wow, probably shouldn't have bet against this stock."
Gross: If you see things improving and you're short, you're betting against the stock, then you want to cover. You want to stop betting against the stock. An influx of buying happens as a result of that. It's commonly known as a short squeeze. You don't want to be on the other end of that, holding short the stock when the stock is skyrocketing up 25%. Now, it depends on a case by case basis how much a stock's increase is caused by short squeezes. It's almost a guess, we won't know until we see how many shares held short decrease. But I would guess in a case like this, 75%-plus of the increase in the stock is a result of short-sellers covering their shorts.
Cross: For reference sake, the number of shares sold short compared to the companies float -- that's basically the shares that are available for trading -- was 30%. That's a very high number, which tells us that there were a lot of investors betting against Stitch Fix running up to this quarter. When the stock starts to move, if they have to go out and cover those shorts, they have to buy the stock in the market, that continues to put more and more pressure on the shorts, so more and more people bidding up the stock, and that continues to send the stock higher and higher.
I think Ron's right. A good part of today's move was because of that short squeeze. I just looked at the numbers and I say, hey, it was a really nice quarter. The growth is continuing for Katrina Lake and for Stitch Fix. There's a lot of competition there, too. Amazon Wardrobe is out there now, they're doing a lot more advertisement. But Stitch Fix, the algorithms they're building, they have more than 100 data scientists out there, they are continuing to build out their offerings in the United Kingdom, which is adding to their cost structure. They continue to make the investments that they need to be able to compete in a very competitive marketplace.
Gross: Remember, shorting can be a pretty risky proposition. A stock can theoretically go up to infinity, but if you're long, a stock can only go down to zero. You theoretically have an unlimited loss potential if you're short a stock. That's why you don't want to let things get too far out of hand. You end up seeing people come back into the market, closing their shorts, and buying the stock.
Greer: Let's talk about the business a bit more. I confess that I'm a bit of a Stitch Fix skeptic. I know it's kind of unfair, but I think of it a little in the same vein as I think of Blue Apron. You're delivering stuff to me. Sometimes I'm not going to use it, I have to send it back -- not the case with Blue Apron. But, is there really a big enough market here? The other thing is, you have this whole "simplicity/does it bring me joy" movement, and Stitch Fix is in the business of getting you to buy more stuff.
Gross: Yeah. I'm a skeptic as well. Andy, correct me if I'm wrong, because I'm not an expert on the stock, but I think it's all really about proving out this algorithm that they have. It's a technology. The technology could actually be used to sell anything, probably. But I think investors, once they feel comfortable with this algorithm, you could see the stock really start to move. But until that happens, everybody's just in wait-and-see mode.
Cross: Yeah. I think if this was Costco Stitch Fix, Mac would be all over it. Generally, you're right. It's a very large market. We still buy about a third of our apparel online. What they're trying to do is, as they get more and more of these 3 million active customers, and these are people who have used Stitch Fix in the past year, continuing to put in more and more data, the data and the algorithm get smarter and smarter, the revenue per user -- which, by the way, continues to see some acceleration and growth, which is really good. As you use Stitch Fix more and more, you spend more and more with them. So, yes, Mac, it is a little bit of getting us to spend more. I mean, that's what retail does, basically. That's their job. They're trying to get us to spend more and more. You think Amazon's not sitting out there trying to get us to spend more and more? Of course they are! Stitch Fix's algorithms are doing that.
They're having some success. They continue to see very healthy retention rates. In the marketplace, data is going to win this game. I think when you look out five, 10 years, we'll be spending more and more of our dollars, when we have to buy clothes, using more sophisticated algorithms than just getting in our car and going to Costco. But Costco is still obviously a great company and great stock.
Greer: As we wrap up here, one of the ways that they arrive at that algorithm is, they actually ask you questions as you're filling out your profile about your fashion sense. In that vein, I'm curious, how would you characterize your fashion sense? Ron Gross, in a word. And Andy Cross, I want you to be thinking about that as well.
Gross: [laughs] Unexciting.
Greer: OK. Interesting.
Cross: 90s with an edge.
Greer: Oh, I like that! I like that!
Gross: Nice. You?
Cross: How about you, Mac?
Greer: I had three words. I had predictable, uninspired, and blue.
Gross: And Kirkland. [laughs]
Greer: [laughs] That's the other problem. I think Stitch Fix would be more appealing to me if they would just send me five blue shirts every month.
Gross: [laughs] I bet they'll do that.
Cross: [laughs] Yes, they will! You can give them 90 data points when you sign up, Mac, and they'll send you lots of blue shirts.
Greer: [laughs] OK. And when we look at the stock, it has been a total roller coaster. Went public in 2017 around $15, got as high as $50, and then fell all the way down to $17. Today, on today's pop, trading in the mid-$30s. So, going forward in the next five years, does this stock beat the market?
Cross: I think it does. Ron had mentioned a little bit about the danger of being short. I will say, Stitch Fix's volatility is about three times as volatile as the regular stock market. You have to be able to sit through the ups and the downs. But I think long term, over the next five years, Stitch Fix is a winner.
Greer: But maybe not a good fit for all investors.
Gross: [laughs] Oh, man!
Greer: Sorry. Let's move on to Dick's Sporting Goods. Shares down Tuesday on earnings. Down big. Ron, falling profits, falling sales, falling same-store sales. That doesn't sound great.
Gross: Not a great quarter, Mac, I think you nailed it! I'll do a little bit of adjusting here because there was a 53rd week in fiscal 2017. So, to be fair, we'll adjust for that. Even when you do, still not a great quarter. Same-store sales down 2.2%. Net sales down 6.5%.
One bright spot, I think we can say, e-commerce sales were up 17%, now account for 23% of total sales vs. 19% in the fourth quarter of 2017. Making some headway online.
Guidance was somewhat tepid. Interestingly, they did raise their dividend 22%. At that rate, you get a dividend yield of about 3.1%. So, for those looking for a yield, not too shabby. Of course, you always have to be concerned about total return. If you're getting 3% yield but the stock's going down, it's not really something you should be all too excited about. We have to keep an eye on the business. They did buy some stock back over the course of the year at reasonable prices, I think. They've got to turn this ship a bit, though. Not a great quarter.
Greer: Ron, last year after the Parkland shooting, Dick's announced they were going to stop selling firearms to buyers under the age of 21. They also pulled all of their assault-style rifles. Today, they came out and announced that they're going to be removing guns from 125 stores. We don't know which stores, they didn't specify that, but they said in markets where the hunting category underperforms.
Gross: Yeah. They did see some weakness when they did it back after Parkland. I guess that makes sense. The revenue in some markets did go down. I will anticipate that this will have an additional effect, causing revenue to go down, even though they're strategically closing in underperforming markets where that category may have not been so robust. But you'll probably see additional dips. But, you know what? They're making a moral, a political, an ethical, I don't know what word you want to use --
Gross: Principled stance. More power to them. Depending on your politics, you're either happy or you're not. But I applaud them for making a decision. They still have a way to go if they're going to roll this out across the board, because there's more than 700 Dick's Sporting Goods stores and this is only 125. But, baby steps, perhaps.
Greer: Looking out over the last five years, shares down big. They've lost to the market. What do you think about the next five years, Ron?
Gross: The stock looks cheap at 11 times earnings and the 3.1% dividend yield, but I just get worried here. You might make some money in the stock over the long term. I don't think it would be a market-beater, though.
Greer: Andy, when you think of Dick's Sporting Goods, is it Amazon-proof?
Cross: No, it's not. Their inventories are growing 67% this past quarter, and revenues are falling, that's a tough sign for retailers. We saw some of the struggles they have with some of the larger brands, especially in the athletic goods over the years. That's going to be a tough spot. I applaud them for the initiatives they're making, but overall, I think Dick's will probably be less relevant over the next five to 10 years than it is today.
Greer: And that's the way the ball bounces.
Guys, that is genius! You didn't like that?
Cross: [laughs] No, I did not like that.
Gross: "Genius" might be a bit of an exaggeration.
Greer: [laughs] I'm kidding! OK, let's wrap up with a happy birthday to the World Wide Web. Thirty years ago, an English software engineer named Tim Berners-Lee submitted the idea at a physics lab in Switzerland, and the rest is history.
Ron, we were talking before the show, and you were recounting your early days as an internet analyst.
Gross: Ah, those were the days, Mac! It was 1996, a simpler time! Al Gore had just invented the internet! No, no. It was 1996. I was an internet analyst, I want to say for the last than a year, during a time where there weren't many internet stocks out there. It was a combination of telecom equipment and the technology behind the internet and internet stocks. I remember I followed America Online and Netscape and Lycos and Excite and Yahoo --
Greer: Lycos, with the dog!
Gross: It was a really interesting time for this new thing called the internet. None of us knew much about it. It was pretty exciting stuff.
Cross: It basically brought me here. I was an analyst at an investment firm in Pennsylvania in '95, when I think Netscape and Yahoo both went public. I was studying media and food and beverage companies. I was like, "Wow, this internet thing is kind of interesting!" And then I knew Tom and David had started The Motley Fool and were on AOL and pushing over to the World Wide Web, which was this exciting, unknown area with chat rooms and all these self-publishing adventures by consumers. It seemed like an exciting place for investors to be.
Greer: I think I first met David and Tom in 1997. I was producing a TV show in Washington D.C., and they were on. It was Halloween. I remember David talking about this company that sold books online called Amazon, and I thought, "This guy is kind of cuckoo for Cocoa Puffs." I mean, I had a perfectly good Books-A-Million just right down the street! "Really? Online books? I don't think that's going to work!"
Cross: The one in Dupont Circle?
Cross: Oh, jeez!
Greer: Yeah, it turns out Amazon's panned out pretty well.
Gross: Yeah, not too bad!
Cross: We're old!
Greer: We were talking a little before the show, do you have a favorite early website? Something you're a little nostalgic for?
Cross: Mine will always be keyword Fool on AOL.
Gross: Oh, nice!
Cross: And then, heading over to keyword Fool and fool.com. I remember I was creating our first online website -- not AOL, this was when AOL was the dominant player online, and then, as the World Wide Web started to grow. Just, thinking about the way we designed that web page... [laughs] The late-night sessions surrounded by a couple of six packs of beer. And, just, what that looked like compared to today... It's a lot of fun to think back. Those were certainly exciting days with what was happening on the investing landscape. Just as a quick reminder, back then, individual investors were basically treated like the bottom of the barrel. The Motley Fool was really trying to advocate for them in so many ways. So this was a great chance for us to spread our message.
Gross: Myspace, baby!
Gross: Myspace! I miss it!
Greer: How about Hampsterdance? Do you remember Hampsterdance?
Gross: [laughs] I remember!
Greer: It was just all these hamsters that would just dance back and forth. It was basically a Space Invaders 2.0.
Gross: I think Ask Jeeves was pretty cool because it was the first Siri kind of AI kind of thing.
Cross: Yeah! And it had the butler!
Gross: The butler, yeah!
Greer: So much better than WebCrawler. WebCrawler is the first search engine I used. It's a spider with a magnifying glass. Don't crawl! I don't want a search engine to be called Manatee, you want something fast!
Cross: It's funny, talking about this. I think this was at the time when the guys at Google were basically at the University of Michigan, designing all their better algorithms than Yahoo, [laughs] back then, just thinking --
Greer: [laughs] And WebCrawler!
Cross: And WebCrawler. As they're developing this and seeing what's happening in the public markets, and then all of a sudden, 10 years later, they're going public and now worth billions.
Greer: So, as we go back 30 years to the invention and the birth of the internet, 1989, first episode of The Simpsons. Which is still running. Top of the music charts: Paradise City by Guns N' Roses, What I Am by Edie Brickell & New Bohemians, and yes, Milli Vanilli's Girl You Know It's True.
Gross: Oh, that ended tragically. That's sad!
Cross: 90s with an edge, baby! 90s with an edge!
Greer: 90s with an edge! OK, as we wrap up here, it's the desert island question. Do not invest this way at home! But, if you're on a desert island, you've got some free time and you've got a few stocks, you've got some investment choices. You've got to buy and hold because you're going to be there for a while. You have to pick one of these for the next five years: Stitch Fix, Dick's Sporting Goods, or, how about the S&P 500, just an index fund?
Cross: I was thinking Ask Jeeves, but I'll go Stitch Fix.
Greer: [laughs] Wow, OK! To beat the market?
Greer: Ron Gross?
Gross: S&P 500, all the way!
Greer: OK. If you have thoughts on anything we've talked about, if you have fashion tips, if you have Stitch Fix advice, if you have favorite old websites, or if you have an opinion on Hampsterdance, let us know!
Gross: How could you not have an opinion on Hampsterdance?
Greer: [laughs] It's so great! They were hamsters, but they were dancing!
Cross: [laughs] Reminds me of the Microsoft paperclip.
Greer: Oh, Clippy!
Gross: I love Clippy!
Cross: So horrible! God, it was terrible!
Greer: That was never a good idea. It's like my segues. OK, firstname.lastname@example.org is our email. Questions, comments, let us know. Ron, Andy, thanks for joining me!
Gross: Thanks, Mac!
Cross: Thanks, Mac!
Greer: As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Andy Cross has no position in any of the stocks mentioned. Mac Greer owns shares of Alphabet (C shares), Amazon, and Costco Wholesale. Ron Gross owns shares of Alphabet (C shares), Amazon, Costco Wholesale, and Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Stitch Fix. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.