The Ratings Game: Stitch Fix stock soars to record gain after guiding for as much as 25% full-year revenue growth

Chief Executive Katrina Lake struck an optimistic tone during her earnings remarks, forecasting continued growth in the fiscal year.

“As we look ahead, we have growing confidence that our track record of strengthening personalization capabilities paired with our nimble supply chain will allow us to deliver better client and business results,” she said on the call, according to FactSet.

“[W]e expect to deliver net revenue growth of 12% to 14% year-over-year in Q2 and to drive further acceleration in the second half of the year resulting in full-year revenue growth of 20% to 25% tear-over-year.”

Lake attributed first-quarter results to a number of factors, including a surge in new active clients, bringing the total to 3.8 million; greater customer satisfaction; a strong back-to-school season and expansion into more affordably-priced product.

The stock shot up as much as 53.3% to an all-time intraday high of $54.94 before paring some gains. The previous record gain was 26.5% on June 8, 2018.

Stitch Fix works by gathering information from customers including size, preferred pricing and style, which is used by the company’s stylists to hand-pick items. These “Fixes” are sent to customers who purchase what they want to keep and return what they don’t. No subscription is required, and shipping and returns are free, though there is a $20 styling fee that’s applied to purchased items.

Earlier this year, Stitch Fix also launched a way for customers to purchase items directly based on items that have previously been kept. Lake says the response to this new offering has been positive.

Key to Stitch Fix’s business is data collection. The company says it gathers consumer preferences and engages with shoppers, using the information to improve algorithms and features.

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“The shift to e-commerce and the dislocation in offline retail strongly positions the company in a recovery scenario through the balance of the fiscal year and beyond,” wrote Stifel analysts in a note. Stifel also forecasts that the company will continue to take market share.

“Stitch Fix’s proprietary data science, predictive algorithms, and stylist network are differentiators versus traditional apparel retailers and competing personalized clothing service platforms.”

Stifel also highlights a couple of new programs including “Shop by Category,” currently in beta, which allows customers to shop according to a personalized feed; and Fix Preview, which is being tested in the U.K. and allows customers to take a look at items selected before they are shipped.

Stifel rates Stitch Fix stock buy and raised its target price to $52 from $30.

KeyBanc Capital Markets analysts say Stitch Fix is “uniquely positioned” to make market share gains, with growth accelerating as demand begins to improve in 2021.

Analysts also think Stitch Fix benefits from plus-size store closures at Ascena Retail Group Inc. ASNAQ, +9.40%, which has filed for bankruptcy and has banners including Cacique and Lane Bryant.

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“We maintain that the plus market remains one of the most underserved online and that recent door closures at Ascena banners continue to free up share. Plus carries unique sizing and fit challenges, which make SFIX well positioned to take share,” analysts led by Edward Yruma wrote.

KeyBanc rates Stitch Fix stock overweight and raised its price target to $56 from $36.

JPMorgan analysts say Stitch Fix executed well in the first quarter, but has concerns.

“[W]e’d like to see margins sustainably turn the corner to get more positive on Stitch Fix shares, and Stitch Fix backed off its prior commitment for margin leverage in FY21,” analyst wrote.

“To be clear, we don’t fault Stitch Fix for wanting to invest in the current environment to drive share gains and capitalize on the accelerating shift of apparel online. But following five straight years of margin compression, we believe the burden of proof lies on Stitch Fix to show that it can drive 20%-to-25% growth while simultaneously increasing margins.”

JPMorgan rates Stitch Fix stock neutral with a $39 price target, up from $27.

Stitch Fix stock has rallied 94.4%, while the benchmark S&P 500 index SPX, +0.28% has gained 14.6% for the year to date.