Why Stitch Fix (SFIX) Stock Is Nosediving

Max Juang /
2024/04/02 4:07 pm EDT

What Happened:

Shares of personalized clothing company Stitch Fix (NASDAQ:SFIX) fell 8.1% in the afternoon session after the major indices pulled back with the Nasdaq down 1.1%, while the Dow and S&P 500 fell 0.9% and 0.8% respectively. Bond yields increased as traders lowered expectations that the Federal Reserve would cut interest rates in June 2024. Also, it's likely investors are taking profits to wrap up the earnings season. 

Macro data remained mixed with the PCE (personal consumption expenditure - the Fed's favourite inflation gauge) price index coming in inline with market's expectations at 2.5% for the month of February 2024 as reported on March 29, 2024. The data showed that inflation remained sticky. With inflation yet to come back down to the Fed's 2% target, the data is likely to raise renewed skittishness about the Fed's pace of rate cuts in 2024. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Stitch Fix? Access our full analysis report here, it's free.

What is the market telling us:

Stitch Fix's shares are very volatile and over the last year have had 73 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 28 days ago, when the stock dropped 17.7% on the news that the company reported second-quarter results that missed analysts' revenue estimates. The weak topline performance was impacted by a decline in active clients, which fell below expectations ( -17% year on year). Revenue per active client also came in weak (-3% year over year).The bigger concern is the underwhelming guidance as the company lowered full-year revenue and adjusted EBITDA guidance. FY'24 revenue is expected to come in at $1.29 billion - $1.32 billion (vs. previous guidance of $1.30 billion - $1.37 billion), and adjusted EBITDA is expected to be within $10 million - $20 million ( vs. previous expectation for $10 million - $30 million). Management attributed the reduced growth outlook to "the current trends we are seeing in active clients." The company also noted it had stopped operations in the UK, which reduced its footprint.

Lastly, Stitch Fix continued to burn cash, and its key profitability metrics, including EPS, EBITDA, and operating income, were much worse than expected during the quarter. Overall, the results were weak.With the results and the stock move, there are surely questions about the long-term viability of the business and long-term product-market fit for the core product.

Stitch Fix is down 30.7% since the beginning of the year, and at $2.48 per share it is trading 51.5% below its 52-week high of $5.11 from July 2023. Investors who bought $1,000 worth of Stitch Fix's shares 5 years ago would now be looking at an investment worth $86.26.

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