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Why Stitch Fix Can Deliver Further Stock Price Gains

Stitch Fix Inc (NASDAQ:SFIX) could record further stock price growth, in my opinion, after its 15% rise in the past year.

The online clothing retailer is improving the functionality of its website, aiming to become more efficient and increasing the availability of its products to boost its sales.

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Online investment

The company is investing in improving the shopping experience of its customers. For example, it is rolling out a service that enables its customers to easily and quickly re-order items of clothing in new colors and sizes. The service could prove to be particularly popular in the retailer's kids segment, with parents having the chance to re-order items in larger sizes as their children grow.

In addition, Stitch Fix is investing in improving its website to make it simpler for its customers to find the items they wish to buy. It plans to include a "shop" section in its mobile app which will use data held by the company on previous customer transactions to suggest specific items that can be purchased quickly. This has resonated with its customers in tests conducted in the fiscal 2020 first quarter, and could catalyze its sales performance as it is gradually rolled out.

Efficiency

Stitch Fix introduced a new method of managing its inventory in fiscal 2019. It considers the potential demand for specific products across all of its customers, rather than focusing on each of its customers individually. It also refreshes the online personalized product recommendations it makes to its customers multiple times per day depending on the company's inventory levels.

This has helped to increase the availability of its products, which could lead to an improving customer satisfaction rate and a greater amount of repeat sales from its customers. In addition, the new inventory management method has contributed to an increase in the average number of items purchased by its customers. This has increased the company's gross margin due to it improving its overall efficiency. The company plans to further refine its method of allocating inventory in fiscal 2020, which could improve its earnings performance.

Possible risks

The retailer's financial performance in its fiscal 2020 first quarter was mixed. Its revenue increased 21% compared to the same quarter of the previous year, but it also reported a net loss of $200,000. Both of these figures were ahead of market analyst forecasts, but highlight that the business is struggling to consistently produce a profit.

This could cause investors to adopt a cautious stance on the company at a time when the retail sector is facing an uncertain period due to factors such as tariffs on Chinese imports and mixed consumer sentiment data. The stock could experience a volatile near-term outlook as a result.

In response, the company has cut its costs. For example, it has reduced its labor costs as a percentage of its total sales in each of the past three years. It is also investing in improving the efficiency of its warehouses to further reduce its costs and boost its chances of generating a profit rather than a loss.

In addition, Stitch Fix has a highly scalable business model. This means many of its costs will not change as its revenue increases. This could mean that even though it was loss-making in the first quarter, a modest rise in revenue may produce a rapid increase in profitability in the upcoming years.

Outlook

Market analysts forecast that the business will deliver a net profit in fiscal 2020, followed by earnings growth of 240% in fiscal 2021. Its forward price-earnings ratio of 105 is high, but its growth potential could lead to a rise in its stock price in the long run.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.