{"id":91420,"date":"2024-07-07T01:04:44","date_gmt":"2024-07-07T05:04:44","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=91420"},"modified":"2024-07-07T01:04:49","modified_gmt":"2024-07-07T05:04:49","slug":"stitch-fix-short-term-pop-wont-fix-longer-term-issues-nasdaqsfix","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=91420","title":{"rendered":"Stitch Fix: Short-Term Pop Won’t Fix Longer Term Issues (NASDAQ:SFIX)"},"content":{"rendered":"
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Wall Street loves a good rebound story, but the critical question is if turnarounds can be sustained. One of the stocks that surprised us over the past month is Stitch Fix (NASDAQ:SFIX<\/span>), the e-commerce company that used to be known for sending its customers a box of five stylist-curated items called “Fixes,” from which customers selected their favorites and sent the rest back.<\/span><\/p>\n

When the novelty of this approach receded, and especially amid weaker consumer spending post-pandemic, Stitch Fix started to tank. But an early-June fiscal Q3 (April quarter) earnings print started to reverse the story, and Stitch Fix has now rallied from its YTD lows and is up nearly 10% year to date.<\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

But again, we have to ask critically: is the company capable of retaining this rally? In my view, the answer is no.<\/p>\n

I last wrote a bearish note on Stitch Fix in April, when the stock was trading in the ~$2 range. And while I certainly didn’t foresee the post-Q3 earnings pop, I am standing by my sell <\/strong>rating on this stock as a plethora of short and long-term risks have emerged.<\/p>\n

Stitch Fix primarily popped on the company’s outlook for Q4.<\/p>\n

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Stitch Fix Q4 outlook (Stitch Fix Q3 earnings materials)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

For Q4, as shown above, the company has guided to revenue declining “only” -14% to -12% y\/y, which is a sequential improvement from a -16% decline in Q3 and a -18% decline in the preceding Q2. The midpoint of the company’s guidance range of $317 million is $10 million, or ~3 points of growth, better than Wall Street’s $306.6 million initial expectations.<\/p>\n

That being said: we have to recall how Stitch Fix is getting there. Earlier this year, the company noted that it would be throwing all of its resources behind improving customer retention, through a combination of both heavier marketing spend plus increasing customers’ touchpoints with its human stylists. <\/strong>All of these efforts are going to be costly, and as reflected in the guidance, the company is expecting only a 1.6-3.1% adjusted EBITDA margin: the midpoint of which is lower than 2.7% in the prior year Q4, and the peak 4.0% margin that Stitch Fix hit in 2021. The company is effectively eroding the gross margin benefits it’s gaining from selling a higher mix of private label items by spending more on sales outreach.<\/p>\n

Here are several other core risks to be mindful of here:<\/p>\n