Stitch Fix Plunges On Disappointing Results (NASDAQ:SFIX)

March 5 ended up being a rather painful day for shareholders of the subscription-driven, web-based retailer known as Stitch Fix (NASDAQ:SFIX). Once a fast-growing player in the online shopping market that was differentiated by its subscription service, the firm has, for the last couple of years, been truly struggling. After announcing financial results following the close of the market on March 4, shares plunged on March 5. As of this writing, they’re down about 22% for the day.

Naturally, this is unpleasant for me, even though I don’t own stock in the business. I say this because, in November 2023, I ended up writing an article about the company wherein I rated it a “hold” to reflect my view that the stock would be unlikely to outperform the broader market for the foreseeable future. Since then, shares are down 30.5% while the S&P 500 has seen an increase of 11.6%. Even back then, I recognized that the firm was facing some rather meaningful problems. A drop in active clients, combined with a reduction in spending per client, ended up resulting in declining revenue, profits, and cash flows. But because of how cheap the stock was after factoring out net cash, I reasoned that not much would have to go right in order for shares to see some nice upside.

Today, we now have a lot more of the same. The decline in users continues even as management works to write the ship. Current guidance for 2024 is disappointing, with overall revenue expected to fall quite a bit. In almost any other circumstance, I would have been bearish by now. But when you look at the balance sheet of the company, I cannot help but believe that, just like with last year, not much needs to go right in order for this business to do well for itself. Given these factors and in spite of the fact that my call has so far been proven wrong, I cannot in good conscience rate the business any lower than a “hold” at the moment.

A look at recent pain… and some good news

After the market closed on March 4, the management team at Stitch Fix announced financial results covering the second quarter of the company’s 2024 fiscal year. Relative to what analysts were expecting, the quarter was pretty bad. Take revenue as an example. Overall sales for the business totaled $330.4 million. That’s a reduction of 17.5%, or $70.2 million, compared to the $400.6 million generated one year earlier. The amount of revenue reported also fell short of analyst expectations by $1.9 million. According to the data provided by management, this drop is really driven by a decline in the number of users that the firm labels as active clients. This ended the quarter at 2.81 million. That’s 572,000, or 16.9% lower, than the 3.38 million that management reported for the same quarter of the 2023 fiscal year.

Another driver behind this drop was a reduction in net revenue per client. In the second quarter of the 2023 fiscal year, the net revenue per client was $530. For the second quarter of 2024, the reading came in at $515. Although this drop is painful to see, there was a bit of good news on this front. The $515 reported by management is actually the highest the company has seen in net revenue per client since the same quarter last year. As you can see in the chart below, net revenue per client actually plummeted to a low of $497 in the final quarter of the 2023 fiscal year. Since then, things have been on a constant upswing. This is not to say that the trend will continue. But it does suggest that management is moving in the right direction on that front.

While the revenue picture was objectively bad, the profitability picture was somewhat mixed. Let’s start off with the bad news. During the quarter, Stitch Fix reported a loss per share amounting to $0.29. This actually was $0.07 per share lower than what analysts were hoping for. It’s never great to see a firm miss forecasts. However, the loss per share did come in far better than the $0.56 per share loss generated during the second quarter of the 2023 fiscal year. Put in other terms, this meant that the company’s net loss went from $65.6 million last year to $35.5 million this year. Other profitability metrics ended up coming in mixed as well. Operating cash flow, for instance, went from $22.4 million to negative $22.3 million. Though, if we adjust for changes in working capital, we would get an improvement from negative $15.1 million to negative $10.6 million. On the other hand, EBITDA pulled back slightly from $6.3 million to $4.4 million.

In the chart above, you also can see results for the first half of the 2024 fiscal year relative to the same time in 2023. This illustrates the fact that financial performance has been weak for more than just a quarter. It’s part of a longer trend. When it comes to 2024 in its entirety, analysts believe that revenue is slated to come in at between $1.29 billion and $1.32 billion. This represents a decline of 20.3%, at the midpoint, compared to the $1.64 billion generated in 2023. However, on an organic basis, the decline is looking to be between 18% and 20% year over year. I say this because management discontinued operations in the UK during the first quarter of this year. It’s worth noting that these estimates do exclude an extra operating week this year from the equation. Management excluded this for the purposes of comparability.

In terms of profitability, the only guidance management gave involved EBITDA. They forecasted this coming in, on a continuing operations basis, and between $10 million and $20 million for the year. To put this in perspective, this number was $16.8 million back in 2023. So it does appear as though management is having some success when it comes to cost-cutting initiatives. Even so, this implies neutral to negative adjusted operating cash flow. And for a company with $301.8 million worth of market capitalization, that’s a rather painful picture to paint.

The good news, and frankly the only news that keeps me from being truly bearish about the firm, is the fact that, in addition to having 2.81 million people willing to pay a rather sizable chunk of money to use the service, the firm has no debt, and it enjoys $229.8 million worth of cash and cash equivalents. When we remove this from the equation, we end up with an enterprise value of just under $72 million. Even hitting the midpoint of guidance provided by management would result in the firm trading at an EV to EBITDA multiple of 4.8. That’s low, no matter how you look at it. It also means that not much has to go right in order for there to be some real value. Let’s say, for instance, that business stabilizes and the firm starts achieving EBITDA of around $40 million per year. Baseline expected revenue for this year, that would imply an EV to EBITDA of 1.8. And it would translate to an EBITDA margin of only three-point 1%. Realistically, a stabilized firm should be trading at 4 or 5 times EBITDA at a bare minimum. So in this scenario, shares would be worth at least double and perhaps nearly triple, what they are currently trading for.

Takeaway

At this point in time, I think there’s no denying that the picture for Stitch Fix and its investors is questionable. The decline in active users is highly discouraging and can eventually lead to even more pain for the business. On the other hand, while the company has missed forecasts for the quarter, it’s showing some improvements on the bottom line. Spending per active client continues to trend higher and the company has no debt, with a surplus of cash and cash equivalents. This means that there’s little in the way of near-term risk for the company. But it does have long-term structural issues that it must contend with. This creates a very binary scenario, whereby if it can stabilize, then the upside for investors can be quite large. But the absence to achieve stabilization will lead to continued declines in users and revenue as well as cash outflows that might lead to this excess cash being used up. Given the very nature of the company, and both the benefits and drawbacks to owning shares, I believe that a “hold” rating is still logical at this time.