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Stitch Fix (SFIX) Up 14.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Stitch Fix (SFIX). Shares have added about 14.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Stitch Fix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Stitch Fix Posts Better-Than-Expected Q1 Earnings

Stitch Fix delivered robust first-quarter fiscal 2021 results, wherein the top and the bottom line not only beat the Zacks Consensus Estimate but also improved year over year. In fact, the company swung back to profits, after posting a loss in the last reported quarter.

Quarterly results gained from growth in active client base. Additionally, the company’s prudent innovations in fix and direct buy offerings are garnering positive response from customers. The company also provided an encouraging top-line view for the second quarter as well as for fiscal 2021, backed by expectations of continued growth in its active client base.

Q1 in Details

Stitch Fix reported earnings of 9 cents per share, which beat the Zacks Consensus Estimate of a loss of 17 cents. The figure also marks an improvement from break-even earnings in the prior-year quarter. The surprise profit came in after witnessing a loss of 44 cents in fourth-quarter fiscal 2020.

Meanwhile, the company recorded net revenues of $490.4 million, reflecting an increase of 10% from the year-ago quarter. The reported figure surpassed the Zacks Consensus Estimate of $481.2 million. Rise in active clients primarily supported the top line. Additionally, efforts to boost women’s and kid’s assortments are yielding.

Stitch Fix now has 3.8 million active clients, up 10% from the prior-year quarter’s levels. Sequentially, the company’s active clients went up by more than 240,000. Management highlighted that this marks the company’s highest sequential client additions.  

However, revenues per active client declined nearly 4% year over year to $467. This was mainly due to surge in new clients, whose spending has been comparatively low. Nevertheless, even new clients have been exhibiting encouraging purchasing behavior in first fixes. This indicates greater retention and increased value for the company in the long run.

In fiscal first quarter, gross profit rose 9% to $219.5 million. However gross-margin contracted 60 basis points (bps) to 44.7%, owing to higher shipping expenses. This was partially offset by reduced inventory reserves and clearance rates.

Meanwhile, selling, general, and administrative (SG&A) expenses increased almost 19% to $239 million. Excluding advertising, other SG&A, as a rate of sales, increased 440 bps to 38.2% due to higher marketing expenses as well as continuous investments in technology talent and the related stock-based compensation (SBC) costs. Moreover, the company’s operating loss was $19.5 million against operating profit of $1.6 million reported in the year-ago quarter.

Furthermore, the company reported adjusted EBITDA, excluding SBC, of $6.9 million in the quarter under review, down almost 60% from $17.3 million reported in the year-ago quarter.

Other Financial Aspects

Stitch Fix ended the quarter with no debt along with cash and cash equivalents of $200.3 million and shareholders’ equity of $428.6 million.

Further, the company provided $57.4 million cash from operating activities during the first three months of fiscal 2021. Also, it reported free cash flow of $51.4 million for the same period.

Outlook

Management provided its view for the fiscal second quarter, on anticipations that the company’s fulfillment centers will remain operational without facing any disruptions stemming from the coronavirus pandemic. In fact, the company expects that its current growth trends are likely to sustain through the second quarter and into the back half of fiscal 2021.

Accordingly for second-quarter fiscal 2021, management projects revenues in the range of $506-$515 million. The projection marks an improvement of 12-14% year on year, fueled by growth in active client base.

Further, it expects advertising expenses, as a percentage of revenues in the bracket of 11-13% in the quarter. Adjusted EBITDA loss is expected in the range of $6-$3 million.

For fiscal 2021, the company anticipates revenues in the band of $2.05-$2.14 billion, which suggests 20-25% growth year on year.

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 -638.89% due to these changes.

VGM Scores

At this time, Stitch Fix has a great Growth Score of A, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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.


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