Shares of Stitch Fix, Inc. SFIX tumbled 7.3% in after-hours trading on Jun 8 on dismal third-quarter fiscal 2020. The company reported loss per share wider than the Zacks Consensus Estimate with a sales miss. Both the top and the bottom lines deteriorated year over year. Results were mainly hurt by warehouse disruptions from COVID-19.
Nevertheless, the company has been witnessing meaningful improvement in its top line in the past weeks. In April, net merchandise revenues improved week over week per week. This momentum continued in May with year-over-year growth in the metric. This reflects the resilience of its U.S. warehouse network and growth in client command. These trends are likely to continue in the fiscal fourth quarter. Moreover, fourth-quarter gross margin is anticipated to grow 200-300 basis points (bps) quarter over quarter, thanks to a balanced inventory portfolio. As a rate of sales, other SG&A, excluding advertising and stock-based compensation, is anticipated to improve quarter-over-quarter on variable labor efficiencies and decrease of one-time costs. However, adjusted EBITDA is likely to be negative in the fiscal fourth quarter.
Furthermore, management anticipates generating positive free cash flow in the fiscal fourth quarter. It also continues to invest in technology talent to boost digital experience.
Over the past six months, Stitch Fix’s shares have lost 5% compared with the industry's 18.7% decline.
Q3 in Detail
Stitch Fix reported loss per share of 33 cents, which was wider than the Zacks Consensus Estimate of a loss of 18 cents and compared unfavorably with earnings per share of 7 cents recorded in the prior-year quarter. Lower sales coupled with higher SG&A expenses have weighed on the bottom line.
Stitch Fix, Inc. Price, Consensus and EPS Surprise
Stitch Fix, Inc. price-consensus-eps-surprise-chart | Stitch Fix, Inc. Quote
Meanwhile, the company recorded net revenues of $371.7 million, showing a 9% decrease year over year. Also, the reported figure lagged the Zacks Consensus Estimate of $395 million. This marks the second straight quarterly miss.
Stitch Fix now has 3.4 million active clients, up 9% from the prior-year period. Also, revenues per active client rose 6% year over year to $498, recording the eighth successive quarter of growth.
In the fiscal third quarter, gross profit declined 17.8% to $151.6 million and gross margin contracted 430 bps to 40.8%. Gross margin contraction was mainly due to COVID-19, which resulted in increased inventory reserve along with higher clearance rate on soft sales.
Moreover, advertising costs were $37.8 million, down 25% from the year-ago quarter. Meanwhile, SG&A expenses increased 4.6% to $197.7 million. As a percentage of sales, SG&A expenses increased 700 bps to 53.2%. Stitch Fix’s operating loss was $46.1 million, wider than loss of $4.6 million reported in the year-ago period.
Furthermore, the company reported adjusted EBITDA loss, excluding stock-based compensation, of $20.7 million in the quarter under review. However, the figure compared unfavorably with adjusted EBITDA, excluding stock-based compensation of $8.8 million.
Other Financial Aspects
This Zacks Rank #4 (Sell) company ended the quarter with cash and cash equivalents of $96.8 million and shareholders’ equity of $422.6 million. Further, the company used $20.5 million cash from operating activities during the first nine months of fiscal 2020. Also, it reported negative free cash flow of $39.1 million for the same period.
In early June, management concluded a $90-million revolving credit facility to reinforce the company’s liquidity position.
Key Picks in Retail
Sprouts Farmers Market SFM has a trailing four-quarter positive earnings surprise of 37.2% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SpartanNash SPTN, also a Zacks Rank #1 stock, has a positive earnings surprise of 76.3% for the last reported quarter.
Office Depot ODP has a long-term earnings growth rate of 6.8%. Currently, it carries a Zacks Rank #2 (Buy).
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