Stitch Fix Inc. (SFIX) has been a perennial disappointment since coming public. At its essence, SFIX helps its customers dress themselves…
Therefore, the biggest risk is always predicting future fashion trends correctly, along with the proper inventory management. Tough game.
Stitch Fix is still losing customers, its revenue is dropping YoY, and there is no guarantee we see them return to strong revenue growth. So you might well ask, “Why am I reading this, John?”
Well, the stock is super cheap and Stitch just reported what we believe is its best Beat n Raise quarter in years, one that had a number of impressive green shoots:
Let me sum it up. This was actually a quintuple-barrelled inflection point:
Taken together, the inflection point in the company’s financials is real. And the stock is still quite attractive, trading for ~0.6x of 1x Sales.
At $6, the market cap for SFIX is $700M, but when you back out the cash of ~$250M, its Enterprise Value is only ~$450M.
IF REVENUE GROWTH RETURNS SOONER, as we think it will, then SFIX could re-rate to 1x Enterprise Value late next year, which would get the stock to ~$10ish.
In some ways, it feels like the next The RealRealREAL Inc. (REAL). Or, a poor man's REAL, as REAL does have 75% gross margins versus SFIX's 45% gross margins and operates a much better business.
Stitch Fix's most important green shoots include:
What makes us inclined to be long: In addition to being a very cheap stock, still in the mid-$5s, the company's inventory initiatives are making impressive strides. From the conference call:
"The quality, freshness and overall health of our inventory assortment continues to improve. The freshness of our inventory is driving improved results across multiple categories like athleisure, social and special occasion and in both our private and national brands. As we shared last quarter, the retail market and our clients' expectations evolved over the past few years, and we did not adapt our assortment quickly enough.”
To address this, we have been focusing on improving our inventory by building best-in-class strategies for buying, assortment planning and allocation. Additionally, enhancements to our proprietary AI inventory management tool are helping to preserve our healthy inventory position. In Q1, we infused more newness and seasonally relevant styles into our offering.
While we still have work to do, the penetration of newness in our inventory increased more than 40% in the quarter, and our clients are responding positively, driving AUR up 6% year-over-year. As an example, we have introduced a larger variety of silhouettes in denim that our women clients are embracing. Sales of wide leg and boot cut styles are up 250% from last year."
Other areas of progress also include:
“In our Fix business, for the first time in more than 3 years, we achieved a sequential increase in clients who have enabled recurring shipments. As we highlighted in our last call, we introduced a refreshed brand identity, the first significant update to our brand in more than a decade.
Alongside our rebrand, we launched a new marketing campaign called Retail Therapy, a content series that explores some of the biggest shopping, fit and style challenges people face and how Stitch Fix as the industry leader in personalized styling is uniquely positioned to solve them. As a result, we are seeing lower cost per acquisition and higher conversion in TV and related channels.
Brand awareness among our target demographics has also improved across our women's and men's businesses, reaching the highest levels in 2 years for women's.”
With Stitch Fix dramatically freshening up its inventory, we believe this new merchandise will help enable them to beat estimates again in Q2. Their new product line is resonating with their consumers which, again, was reflected in the 5% increase in spend from Active Clients.
As we look ahead, we think Stitch Fix has strategically left room on the table for another beat. On the heels of best Beat n Raise in years, the Q1 report will attract a host of new value investors who see what we do - a potential return to revenue growth much more quickly than management is modeling.
In this vein, after disappointing investors forever, and particularly last quarter, SFIX's management team is making sure NOT to get ahead of their skis, allowing themselves time (2026) to return back to YoY growth. But with Active Clients ordering more, old customers returning to engagement and a strong refresh of inventory – a 300% increase in newness by the end of this fiscal year – odds heavily favor a return to revenue growth 4 quarters from now, not 7-8.
We think the stock will inflect too to $6.5-$7.5 by early Q1 and to $8-$8.75 by next summer/fall. A re-rating toward a 1x Price-to-Sales is very reasonable for a deeply-cheap stock whose underlying fundamentals have turned up, perhaps, in a structural manner.
We recommend buying the first flush down to low-to-mid-$5s this morning with our near-term target mid-$6 to mid-$7.
There are more risks than normal with SFIX, however, and consequently, our conviction is only an 8.
First, the stock has run into the print, so again, we recommend bidding and buying the first flush down to the low-to-mid-$5s.
SFIX has traded ~100M shares since it bottomed in late September, so there are a lot of short-term and long-term embedded shareholders who will be selling in the 5s.
We do think the stock will trade a huge volume inflection as it traded 3.5M shares in AH, so it will only be a matter of a few days to wait to take out these sellers, but all this resistance is a big risk factor.
We therefore do not recommend buying above $5.75.
Also, because their results have been so inconsistent and since there is no guarantee they will continue to make improvements to their operations and reinvigorate their brand, even though this fits the mold of a Top Tier Inflection, we plan to play it lightly. Again, our conviction is only an 8.
For instance, Stitch Fix’s revenue is still declining double-digits YoY and they are still losing customers:
“Net Active Clients ended the quarter at 2.4 million clients, representing our lowest sequential decline in active client count in 2 years, down 19% year-over-year and down 3% quarter-over-quarter.”
But the key green shoot here is the rate at which they are losing Active Clients declined at its slowest pace in 2 years, down only 3% QoQ. Once this metric flips positive, that will lead to positive revenue growth.
Looking at consensus, another negative is: While we see upside to forward revenue and EBITDA consensus, we do not see MEANINGFUL upside to revenue consensus. In an Uber Bull case, we do think we could see EBITDA inflecting to $65M next fiscal year, which could get the stock to $10-$12-$14, depending upon what multiple you would want to give it at that time.
Finally, because of all the aforementioned negatives and risks, we plan to play this name lighter than normal and to also offer out stock from $6-$7-$7.5. It is not a name we expect to double and triple on quickly in other words, but also one we think that will work. We just don't plan to overweight it.
As such, with a much lower than normal positioning for a Top Tier quintiple-barrelled inflection name, we will also give a wider, Stop Loss: 10% stop from cost.
Although we do not expect big upside, we do think the odds of this working are 65%-70%.
It just may not work immediately today and may take some additional time to get the follow through we want. IF we are right, after trading out of 75% of our position $6-$7-$7.5, we plan to leave a small sliver on for long-term upside too.
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Disclosure: We are long SFIX stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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