As Stitch Fix announces its third-quarter numbers after the market close on Monday, investors are bracing for what might be another roller coaster for their Stitch Fix stock price.
Investors should keep an eye out for three major points that might come out in Stitch Fix’s earnings report.
- A growing clientele as fashion demand rises
Stitch Fix shares, which have a market capitalization of about $6 billion, have risen about 40% in the last month on the expectation that some of Stitch Fix’s pandemic-related headwinds have begun to subside and that customers are returning to its platform for work wear and special occasions.
However, the stock may be nearing its peak. According to a FactSet survey of 17 Wall Street analysts, the average price target is $54, with the majority of analysts rating the stock as a hold. This is slightly lower than where the stock closed on Friday: $55.52. On January 27, the stock reached a 52-week high of $113.76.
Dana Telsey of Telsey Advisory Group is an outlier, with a $84 price target on the stock, the highest among FactSet’s surveyed analysts.
Shipping headwinds, which many retailers have faced in recent months, are expected to ease, according to Telsey. She also stated that Stitch Fix is well-positioned to gain market share in the apparel category as more people shop online.
Given consumers’ rebounding demand for fashion, Evercore ISI’s Mark Mahaney told clients that Stitch Fix could have more upside this quarter. Companies such as Macy’s, Target, Gap, and Rent the Runway have all noted this in recent weeks. Stitch Fix shares have a price target of $78 at Evercore ISI.
Mahaney anticipates that Stitch Fix will have 3.9 million active clients in the third quarter, implying 23,000 net additions compared to a loss of 47,000 clients in the prior year.
Stitch Fix defines “active clients” as people who have purchased an item directly from its website in the 52 weeks preceding the end of the quarter. Stitch Fix added 110,000 new active clients in its fiscal second quarter.
Mahaney also expects annual revenue per active client to be $500, representing a 1% increase year over year and a 7% increase quarter over quarter. Stitch Fix invested in additional categories that customers can add to their boxes every month, such as intimates, to keep that revenue growing.
- Supply chain issues cloud the picture
Many analysts are more cautious after Stitch Fix lowered its own forecast, citing uncertainty caused by the health crisis, which has made predicting consumer demand more difficult.
In fiscal 2021, the San Francisco-based company expects year-over-year revenue growth of 18% to 20%, down from its previous forecast of 20% to 25%. According to Refinitiv data, analysts are now forecasting a 19.1 percent increase.
In addition to regaining customers who paused their subscriptions during the pandemic, Stitch Fix must demonstrate that its supply-chain woes are subsiding. The company has been working to reduce the time between when it orders inventory and when it arrives at warehouses. As a result, there are backlogs. Throughout the winter, lower customer spending on apparel and accessories ate into sales.
It is unclear how long these headwinds will last and how much further damage they will cause to the business. Management has attempted to assuage concerns by stating that Stitch Fix is working quickly to diversify its carrier network in order to mitigate the problem.
Nonetheless, JPMorgan internet analyst Cory Carpenter stated that he is “cautiously biased” ahead of Stitch Fix’s third-quarter report due to his firm’s lack of visibility into how Stitch Fix is dealing with the delivery issues. JPMorgan has set a price target of $39 on the stock.
Stitch Fix is also subject to higher shipping rates than many digital-only retailers because its customers frequently return parts of their orders, according to Carpenter. He claims that they rarely keep everything.
- Specifics on the direct-buy offering
The direct-buy initiative is one of Stitch Fix’s biggest investments to drive growth in the coming quarters. In addition to its subscription service, active clients can now purchase individual items to complete outfits, including suggested merchandise based on prior purchases or recommendations.
In March, incoming CEO Spaulding stated that approximately 25% of the company’s active female clients had made a direct-buy purchase. Later this year, the company plans to make its direct-buy option available to new users.
“The long-term vision is to provide the most personalized shopping experience in the world,” Spaulding said during a recent earnings conference call with analysts. “And search has really characterized e-commerce for apparel.”
However, there is still widespread skepticism that this will go as planned by Stitch Fix. Some analysts argue that it will change the business too much from how it began, as a subscription-only service powered by data and analytics.
Erinn Murphy, senior research analyst at Piper Sandler, is interested in learning more about how Stitch Fix plans to scale its direct-buy program.
“We are interested in learning more about how Stitch Fix is meeting the needs of consumers looking for something for the ‘here and now,’” she wrote in a note to clients. Piper Sandler has set a price target of $47 on the stock.