Stitch Fix: Operational Efficiencies Not Enough To Stop Revenue Decline (NASDAQ:SFIX)

I first reviewed Stitch Fix (NASDAQ:SFIX) back in February of this year. Since the time of that article, the stock is up 12%, but it is still underperforming the S&P 500.

Despite the increase in the price of the stock since that initial article, I’m still bearish on the company and am not sold on the company’s turnaround story.

Let’s dig into the company’s latest quarter and discuss recent events.

Investment Thesis

As previously noted, Stitch Fix is a retail company that offers personalized “fixes” to men, women, and children. The company’s stock rose to nearly $100 a share during the COVID-19 pandemic before cratering. The company has since changed CEOs several times (including losing the company’s founder Katrina Lake) and have let go of numerous employees.

Currently, Stitch Fix has roughly 2.6 million active consumers and provides clothing options from popular brands including Vuori, Calvin Klein, and several others as you can see below:

Stitch Fix believes they have an addressable market of $124 billion related to online retail as you can see below which is part of the overall addressable apparel market of roughly $409 billion:

However, Stitch Fix’s client count has been steadily declining resulting in less revenue generation, which I’ll discuss next.

Financials

Revenue for Q3 of Stitch Fix’s fiscal year 2024 came in at roughly $322 million, which is a decrease of 16% compared to the same quarter in the prior year. The company’s revenue has continued to decline each of the last several quarters, as you can see below:

Stitch fix now estimates they will earn between $312 to $322 million for the fourth quarter and revenues of $1.33 to $1.34 billion for the full 2024 fiscal year. This means the company will have continued declines, as Stitch Fix has seen full-year revenue figures continuously decline since 2021.

The company had 2,633,000 active clients in Q3 2024 which is a 6% decrease quarter-over-quarter and a 20% decline compared to the prior year. Stitch Fix continues to lose clients, as this graphic below illustrates:

As you can see below, the company posted a net loss this quarter which is very nearly the amount posted in the prior year third quarter:

However, the net loss YTD is smaller this year thanks to a reduction in SG&A expenses. The company does continue to dilute shareholders as you can see the number of shares outstanding continues to rise:

The company’s gross margins were 45.5% for the quarter which is better than the prior year and net revenue per active client did increase 2% which is a positive sign.

Stitch Fix still maintains an excellent balance sheet as you can see below:

The company has no long-term debt and enough current assets to cover all of their current liabilities.

AI Efficiencies and Stylist Focus

On Stitch Fix’s most recent earnings call, the company’s CEO, Matt Baer, noted numerous operational improvements to the business. Using AI and improved internal analytics, Stitch Fix is finding ways to get customers to purchase more when a “fix” is ordered. On the call, Baer went on to say, “Utilizing our proprietary demand algorithms, we improve the performance of Quick Fix’s by only offering them to clients when we know the new fixes have a high likelihood of success. Within three weeks of this change, Quick Fix average order value improved by 25%.”

Furthermore, through the use of AI, the company is making better buy decisions as Baer went on to state, “… We continue to scale our AI inventory buying tool to inform a larger set of buying decisions. This tool sifts through our proprietary transactional and client data to predict demand at the individual style and client level, empowering our merchandising team to make buying decisions that are more effective and efficient.”

It is certainly promising to see the organizational efficiencies gained through the use of AI, especially if AI can help improve the company’s chances to get clients to order more per fix.

Another interesting item on the earnings call was the discussion regarding having stylists come more into focus. When I have ordered fixes in the past, I’ve noticed some stylists seem to have better ideas than others. I think it would be interesting if individuals could perhaps collaborate with their stylist or even request a stylist if you are really enjoying the selections of a particular individual. On the Q3 earnings call, Baer had this to say about stylists, “… Our stylists continue to play a critical part in our value proposition, and something that our clients have told us is that they want to get to know the stylist behind their fixes.”

I certainly think this is a good idea and believe this could help Stitch Fix retain customers if buyers were able to develop some rapport with their stylists.

Valuation

Stitch Fix has a valuation grade of a “B+” at Seeking Alpha:

Given Stitch Fix is unprofitable, I think price to sales is the best metric valuation. Stitch Fix does have a forward price ratio which is better than the sector median. Also, Stitch Fix has a better price to sales compared to The RealReal, which has a relatively close market cap.

Although The RealReal (REAL) is projected to have revenue growth in the coming year (albeit minor growth). As you see below, Stitch Fix is still expected to struggle over the next several years:

Furthermore, Wall Street analysts see downside for Stitch Fix as the company has an average price target of $3.60:

I think it’s difficult to say this is a value stock given the continuous revenue decline and meager forward-looking estimates.

Conclusion

Stitch Fix has some noteworthy positives, as the AI and analytic-related operational efficiencies seem to be helping increase client spend, and the company was able to improve gross margins for the quarter. Also, Stitch Fix still maintains an excellent balance sheet with no long-term debt.

However, Stitch Fix continues to see client losses, which is in turn leading to continued revenue declines as the company is nowhere near close to achieving profitability. Also for investors, Stitch Fix continues to dilute shareholders as shares outstanding have continued to rise for the last few quarters.

Although the valuation might be reasonable, given the continued expected revenue losses, coupled with the negative projections, I’m inclined to side with Wall Street’s price target as I think the company’s stock price will decline in the last few months of this year.

I’m not sold on the comeback story, as I still foresee a very long road to profitability for this company.