Stitch Fix, Inc. (NASDAQ: SFIX)
Consensus EPS Estimate for FQ4 2019 is $.04 (-12.02% YoY)
Consensus Revenue Estimate for FQ4 2019 is $432.44M (+35.86% YoY)
EPS revisions past 90 days include 8 upward and 0 downward
Revenue revisions past 90 days include 1 upward and 1 downward
SFIX will report Q4 2019 on Tuesday, October 1, 2019, AMC. SFIX is up 9.25% YTD, but down 38.63% for the QTR. SFIX is an online personal styling service that uses human personal stylists and data science to ship out clothes to customers. This is a heavy algorithm data-intense company. SFIX targets Women, its largest segment, Men, which launched in September 2016 and Kids, which launched July 2018. SFIX is predominantly US-based but launched in the UK in May 2019. To start with SFIX, you pay a one-time fee, answer an extensive 80 question survey. You then receive a box with 5 items of clothing, if you keep them, you pay for the clothing, if not you return what you do not wish to keep. SFIX offers multiple brands created for style and price and, also has its own exclusive brand.
Last four quarters the company has surpassed earnings estimates and has shown solid revenue growth and active users. Revenue growth per client and client count (3.1mm) have risen four quarters in a row. In two of the four quarters the stock has gapped up and in two quarters the stock has gapped down after earnings.
The UK and the Kid’s category ramp efforts remain underway, these two divisions are early stages and the company defines these as a “Launch & Learn Strategy” approach.
Overall, gross margins have improved the last few quarters and the Men’s GMs are now closer to the Women’s GMs. Inventory turns over six times a year for SFIX, which allows them to be more reactive to purchasing seasonal inventory and has contributed to the improvement in GMs this year. The company has also recently employed inventory algorithms, that they believe over time will continue to help them manage this better.
Why is the stock down so much in the last quarter?
1. SG&A
Aggressive spending to expand has made SG&A expenses a big issue. Heavy marketing spending with higher advertising costs, UK preparation and launch costs, investment in technology talent, higher compensation, benefits expenses, and stock-based compensation are all the reasons. SFIX says they are making investments for the long term.
In late August, SFIX announced the purchase of Finery, which uses patented technology to scan receipts which then populates the wardrobe purchases and helps clients keep track of what they own. Additional expenses for this acquisition will come in to view in Q1 2020 and will likely be discussed in the upcoming call. The company’s overall marketing budget spend is targeted at 9 to 11% of revenue for reference.
2. Increased Competition
The increased competition came in August from Amazon’s personal styling service, which put pressure on the stock. There is no evidence, yet that SFIX is losing share to Amazon or other rivals. But it is likely other apparel companies will launch their own personal styling segment given the revenue growth rates that SFIX has shown, thus concerns over competitive threats will persist. The company believes that its competitive advantages remain its personalization, data science and, brand access for clients.
3. Insiders have been dumping the stock. The CEO seems to sell every share she receives. Insiders only hold 4.3%. I personally am not fond of stocks when insiders hold little to no skin in the game. It is alarming that the CEO, President, various directors and beneficial owners of 10% or more of stock have sold shares whenever they have an opportunity.
The shorts are now at a record high with 40% of the float.
Zacks rates SFIX a 3 hold and it gives SFIX a 0.00% Earnings ESP.
EarningsWhispers shows 88% expect earnings beat and 86% expect price sentiment to rise.
Last year SFIX had a huge drop when they reported this quarter after guidance spooked investors.
The sentiment for SFIX is very poor. We certainly expect revenue to beat and user metrics to be strong and growing especially since it launched in the UK. We expect expenses to be up and the outlook for more expenses does not seem diminished near term. The insiders have been heavily selling in August and September.
But the stock is quite beaten down and heavily shorted and has traded in a range between 16 and 32 this year. From a risk/reward basis, next week’s implied volatility levels for SFIX have an up or down move of 3.85 points, which is 21% movement up or down. Good luck Traders!