Dec 13, 2021
[4 min Read]
Stitch Fix, Inc. (SFIX) sells a range of apparel, shoes, and accessories through its website and mobile application in the United States. The company's mission is to change the way people find clothes they love by combining technology with the personal touch. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags for men, women, and kids under the Stitch Fix brand. Stitch Fix, Inc. was incorporated in 2011 and is headquartered in San Francisco, California.
SFIX is down more than 80% from its $113/share price in January-2021 to $19/share price recently. In the last week alone stock dropped by more than 20% despite the company delivering better-than-expected revenue ($581.2 Million vs. $571 Million analysts' expectation) and EPS (-0.02 vs -0.13 expectation) for the first quarter of 2022(ended in Oct-2021). The revenue grew 19% year over year (YOY).
Management reduced the revenue guidance to just 3% YOY growth in the next quarter and overall high single-digit growth in the fiscal year 2022 vs the past YOY growth guidance of 14-15%. The company also experienced lower net client additions than normal after launching its Freestyle service in September. The freestyle program, which the company has also referred to as direct buy, allows customers to shop directly on its website. The first quarter marked the first time that Freestyle was available to new customers and opening that new market was expected to give a lift to the company's sales. However, management mentioned obstacles related to onboarding new clients. It seems some clients are confused between which options they should try after signing up, such as Fix Preview, which lets clients see what items they are receiving in a Fix before it ships, and Freestyle, which allows clients to buy whatever they want directly from Stitch Fix.
Another issue is gathering information about new clients' style preferences. For Freestyle to work, new clients must provide the company information by answering the short quiz. Stitch Fix relies heavily on this feedback to deliver the right product to clients, but only a fraction of new traffic fully completes this quiz, which presents an obstacle. CEO Elizabeth Spaulding said the company will be investing in the near term to reduce friction for new clients to access Freestyle. The company plans to test new ways for clients to get started on the service without selecting too many answers/preferences to get their recommendations.
Company is also facing other issues such as supply chain delays, marketing headwinds from Apple's new ad-targeting restrictions, and a customer referral program that was less successful than expected.
The company just started a freestyle program, which is unlike its traditional Fix model, in which customers receive a box of five items selected by a stylist. I believe Stitch Fix's freestyle could be a long-term growth driver since it allows new clients to order curated items outside of a normal Fix service it has since the company's inception. A new freestyle program will also help to change the perception of Stitch Fix as a subscription service and broaden the company's TAM (Total addressable market opportunity).
Reduced revenue guidance for the next quarter will hurt the company in short-term, but what might be getting overlooked is that management mentioned during the earnings call that these are, indeed, temporary problems. Management is currently making improvements to the algorithms to combine clients' feedback and style preferences with real-time shopping behavior, which should lead to better client outcomes with the Freestyle service. CEO, Elizabeth Spaulding said that the technology investments the company is making now "will pay off in a big way over the long term."
Stitch Fix still offers a great value proposition to consumers. It's saving clients time by using machine learning to deliver recommendations, and it's got 10 years' worth of data to build sophisticated algorithms. The U.S & UK Apparel, footwear, and Apparel Accessories online market (TAM for SFIX) was $127B in 2020 and is expected to grow to $220B by 2025. Which represents a huge growth opportunity for SFIX.
SFIX has no debt and currently holds around $250M in cash. At the current price, company is trading at about $2.1B market cap with $2.19B in revenue (TTM) which makes the price/sales (P/S) ratio less than 1. If we compare it to the other online fashion retailer such as revolve (RVLV), P/S ratio less than 1 on SFIX looks cheaper vs P/S ratio of more than 6 on RVLV. Now, to calculate SFIX valuation if we consider conservative numbers say it can grow its revenue just in high single-digit ~8% for the next 5 years then that would make the total revenue around $3.21B by 2026. Consider this, if SFIX can achieve 10% in net profit as RVLV by 2026 (SFIX was profitable before COVID-19) it should be able to generate $321M in profit. If we assume 15 P/E on the company (RVLV is trading at above 50 P/E) then that would make the company valuation $4.815B or $43.8/ share by 2026. This represents 129% upside in 5 years or 18% average return per year Considering SFIX's current share price $19 / share.
This is not financial advice. It is just a personal opinion so please do your own research before making an investment decision.