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Stitch Fix Stock Is Beginning to Look a Lot Weaker

Will Healy

Several sources have announced that Stitch Fix (NASDAQ:SFIX) will lose one of its top executives. Chris Phillips, who heads men’s and kids’ clothing, will leave Stitch Fix to become CEO of Mizzen+Main. What effect, if any, this change will have on Stitch Fix stock remains unclear.

Stitch Fix Stock Would Be a Winner If Technology Was the Only Concern

Source: Stitch Fix

However, it may serve as a reminder of the competitive challenges that could threaten the company in the future.

Stitch Fix’s Success

Put simply, I would not trade Stitch Fix stock based on Mr. Phillips leaving the company. Traders seem to agree. Despite this news, SFIX barely moved in Tuesday trading following the report.

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However, does this mean other clothing companies want to draw on the knowledge of Stitch Fix executives to compete using technology? Perhaps.

Admittedly, using artificial intelligence (AI) to choose clothing based on a customer’s individual preferences sounds compelling on the surface. Consequently, Wall Street forecasts revenue growth of 26.6% this year and 21.3% in 2020.

Earnings also turned positive last year. Though profits will likely fall this year, analysts expect earnings growth of 22.7% next year, and earnings increases averaging 46.7% per year in later years.

This growth has probably helped drive SFIX’s multiple to elevated levels. Stitch Fix stock now trades at almost 99 times forward earnings. I urge caution at such multiples, even when justified by a firm’s growth. However, this valuation does not necessarily mean Stitch Fix will fall.

Can Stitch Fix Compete?

The personnel change possibly speaks to a more significant concern about rising competition. I see little that would stop a Macy’s (NYSE:M), Amazon (NASDAQ:AMZN), or now, Mizzen+Main, from offering a similar service. In fact, Nordstrom (NYSE:JWN) acquired an AI-based clothing selection system when it bought Trunk Club in 2014. However, Nordstrom later wrote down much of the value in Trunk Club.

To its credit, Stitch Fix has built a competitive moat by bringing more than 1,000 brands into its ecosystem. Despite its reach, I would caution against viewing SFIX as the Roku (NASDAQ:ROKU), or the neutral arbiter of the clothing industry.

I think my colleague Laura Hoy described the approach of Stitch Fix well in her comparison of the company to Blue Apron (NYSE:APRN). Like with Blue Apron in sending food items, I can see customers having reservations about SFIX sending clothing based on an AI-based assessment of one’s clothing tastes.

I also share Ms. Hoy’s concerns about a service like this becoming a novelty. Stitch Fix’s data offers a competitive advantage. However, I do not think it will permanently prevent customers from seeking self-driven choices outside of the Stitch Fix ecosystem. Until the company can prove that it can keep most of its customers, I would not recommend paying a premium valuation for SFIX stock.

The Bottom Line on Stitch Fix Stock

The departure of Chris Phillips to another company will not materially affect SFIX stock, but it does speak to the competitive dangers facing the company.

SFIX remained largely unchanged in trading following the news. The company continues to drive consumer interest, revenue growth, and increasing profits with AI-based clothing choices.

However, Nordstrom already uses the same type of technology. Other firms, including the one where Mr. Phillips will take over as CEO, could follow suit. Moreover, many consumers will probably not want machines making their clothing choices. Others may use it for a time and then switch back to more traditional shopping methods.

Stitch Fix continues to manage itself well on the financial front. However, given the likely challenges in keeping customers in the Stitch Fix ecosystem long term, I see Stitch Fix stock as a trade at best.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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