Antonio Diaz
Investment thesis
Stitch repair (Nasdaq: SFIX) delivered a surprise earnings report, which saw its shares jump more than 20% before it went to market.
Investors who long ago abandoned this name will now be eager to place hopefully higher bids This falling stock has taken an unjustifiable beating.
Here, I highlight the bearish argument, which is that business growth rates paint a picture of a dying business. I then comment on the positive aspects of the thesis, which is that Stitch Fix has a lot of cash and no debt.
Previously, I was openly skeptical of the name. While I maintain that this stock is still very risky, I recognize that this stock, at this valuation, could see significant short pressure. Therefore, I am revising my rating upwards to a comment, even if I remain on the sidelines here.
fast a summary
Back in October, I wrote a bearish analysis on Stitch Fix where I said:
The core issue is that Stitch Fix’s goal is to help customers find fashion options that match their unique styles and lifestyles.
However, as we move beyond the narrative, I don’t see enough reason to be bullish on this stock.
The author worked on SFIX
Since that time, the stock has fallen 18%, while the S&P 500 has risen more than 20%. In other words, despite a very strong tide that lifts all boats, SFIX has been left behind.
Stitch Fix’s near-term prospects
Stitch Fix is a retail company that combines custom design and data science to deliver curated fashion experiences to its customers.
Leveraging customer data, Stitch Fix provides personalized recommendations aimed at meeting individual style preferences and fit requirements.
Stitch Fix’s near-term prospects look fair given its strategic focus on reimagining the customer experience.
Recent changes, such as improving the Quick Fix service and improving pricing strategies, have already shown positive results, such as a 25% increase in the value of a Quick Fix order.
Deploying improved inventory management has also enhanced the effectiveness of purchasing decisions, resulting in improved inventory productivity.
However, not everything is positive. First, Stitch Fix faces significant headwinds, particularly in acquiring new customers. Despite efforts to optimize marketing channels and improve conversion metrics, the company continues to suffer from a declining active customer base, which is down 20% year-over-year. These are not small losses we are talking about here.
Moreover, the company’s new reliance on AI does not come for free and requires significant investments.
Given this background, let us now discuss its basics.
Stitch Fix’s outlook improved slightly
SFIX revenue growth rates
The chart above should show what investors are looking at. Investors are looking at a company that has consistently delivered negative annual growth rates for 8 consecutive quarters (data shown now), while its outlook for the next quarter is expected to be negative again. More specifically, taking into account the high end of its guidance, Stitch Fix’s revenue will come in at negative revenue growth rates of about 12% year over year in the next quarter, fiscal Q4 2024.
This is not a viable business. This is a business that struggles. Simple and pure. The only reason its growth rates next year might be less dismal is simply because the bulk of its strong business has already been lost. Now, Stitch Fix operates as a shadow of its former self. This is a high-risk investment. Given this context, let us now discuss the case of the bull.
SFIX stock valuation – 12 times EBITDA for the year
I think SFIX is fairly valuable. And this is why.
As it stands now, including the pre-market jump, Stitch Fix’s market cap is about $350 million. However, approximately 70% of this market capitalization consists of cash.
More precisely, Stitch Fix’s balance sheet has about $245 million of cash and cash equivalents and no debt. Let that sink in. That’s a lot of money. But that cash isn’t worth anything unless management does the right thing with that money.
Here the Taurus issue becomes more complicated. Stitch Fix is ruthlessly reducing its cost structure. Thus, this has allowed Stitch Fix to reach up to $30 million in EBITDA this year. On the surface, this sounds great.
As of the latest quarter, Stitch Fix’s fiscal 2024 was expected to generate about $20 million in EBITDA at the high end. The fact that within 90 days of this report, Stitch was able to improve its EBITDA guidance to as much as $30 million at the top end gives investors hope that the worst of its outlook is now in the rearview mirror.
This, in essence, is the Taurus issue. However, I wonder if paying for Stitch Fix really makes sense. After all, the company can only cut its costs so far. After a while, it should start to see some growth to support its operations and bottom line.
So, paying around 12 times EBITDA for a company that’s 70% cash, and no debt, looks pretty great. This means that on an EV to EBITDA scale, the stock is cheaper at 4x EBITDA.
But again, it all depends on whether the administration is able to stabilize its bottom line.
Bottom line
In short, Stitch Fix’s financial outlook is a mixed bag, prompting a cautious stance on its valuation. While the company boasts a large cash reserve and has managed to improve its EBITDA guidance, concerns remain about a decline in its customer base and continued negative revenue growth rates.
Despite recent efforts to reduce costs and improve profitability prospects, the sustainability of Stitch Fix’s business model is highly uncertain, especially in light of its inability to reverse the trend of customer loss.
With recent market optimism reflected in the stock’s pre-market jump, investors should carefully evaluate whether paying for Stitch Fix really makes sense. For me, I’m very committed to staying on the sidelines, because I know there are easier investments elsewhere.
