The Ratings Game: Stitch Fix shares plunge as ‘messy’ business transition could stall sales growth

“[O]ur sequential net client additions were lower than prior quarters, and we are currently making changes to get this moving in the right direction,” said Stitch Fix Chief Executive Elizabeth Spaulding on the call, according to a FactSet transcript.

One of the changes the company is making is the addition of the “Freestyle” program, which offers clients the chance to purchase a personalized outfits.

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Stitch Fix is known for its “Fix” shipments, which are customized by stylists who make selections for the customer based on a style quiz that gathers information like size and style preference. Shoppers can purchase what they like and return what they don’t.

“There will be significant learning and experimenting to build this future of retail experience,” Spaulding said.

“We may experience short-term impacts of cannibalization. We will be implementing new systems and we are building new workflows. All of this learning of new motions is in service of building a great customer experience, and we will need to optimize these. We do not anticipate a linear journey.”

All of this adds up to “limited visibility,” according to KeyBanc Capital Markets, which downgraded Stitch Fix shares to sector weight from overweight.

“We believe the onboarding Style Quiz for customers interested in Freestyle continues to be too lengthy, and conversely, customers with high Fix intent may be distracted by the options for Freestyle,” analysts said, though they continue to believe in the company’s personalization capabilities.

“We expect a decline in active clients in 2Q and an uncertain 2H (management
believes it will return to growth).”

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Analysts also say the company will have to invest more in marketing and technology to grow the “Freestyle” program.

The stock was on track to close at the lowest price since May 2020 in afternoon trading. Trading volume ballooned to 22.8 million shares, more than 10 times the full-day average.

Wells Fargo maintained its underweight rating and slashed its price target to $14 from $35. Analysts called the quarter “extremely disappointing,” and said it is “very damaging to the bull case on the story.” Analysts note that all of this happened at a time when “the apparel market has never been as robust.”

Wedbush cut its price target to $21 from $45 while maintaining its neutral stock rating; BMO Capital Markets cut its price target to $25 from $40 while hanging on to its market perform rating; and Stifel held its hold stock rating but halved its price target to $23.

“The core ‘Fix’ business is underwhelming (a ‘niche’ offering with diminishing returns as it grows) and the ‘Freestyle’ service has better long-term prospects, but the transition from one business model to the next is proving to be messy,” said Wedbush analysts led by Tom Nikic.

“If they can pull it off, the stock could re-rate higher, but until we see evidence/visibility of fundamental stabilization, we’re comfortable avoiding this
one.”

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Truist Securities maintained its buy stock rating and only cut its price target by $6 to $40.

Analysts say the problems the company faces are “transitory, which should
start abating in F2H22, and believe that the stock offers compelling value at current
levels given prospects for Stitch Fix to return to double-digits growth with margin
expansion in FY23 and beyond.”

Stitch Fix stock has sunk 67% in 2021 while the S&P 500 index
SPX,
+0.31%
has gained 25.1%.