Stitch Fix Soars After Earnings Beat

Stitch Fix (NASDAQ: SFIX) stock closed up 25% yesterday. The company provides online personal styling service and sells apparels & accessories to fit the client’s tastes, lifestyles, and budgets. The stock is currently trading at a forward P/E ratio of 139. Let’s analyze why the stock is moving up in spite of high valuations.

The company released its second quarter fiscal year 2019 results on March 11, 2019. Revenue was up 25% year-on-year to $370.28 million which beat analysts’ estimates by $5.42 million. Stitch Fix has posted six consecutive quarters of over 20% growth. Earnings per share came at 12 cents compared to 2 cents for the same period last year and beat analysts’ estimates by 7 cents.

Active clients grew 18% year-on-year to 3.0 million. This is a great milestone for the company as the company has been able to grow its active clients on a compounded annual growth rate of 28% from FY 2016 to FY 2018. On an average client spend also rose 6.1% to $463. Client retention is also high. It is a data-driven company and this differentiates from other online retailers. Stitch Fix employs about 100 data scientists.

The company was also able to improve the gross margins to 44.1% compared to 43% for the same period last year. The management’s inventory management helped to increase margins. On the longer term, the management expects margins in the range of 45-46%.

Advertising expenses were 6.5% of revenue, below the 6.7% in the same period last year. The advertising expenses were reduced as planned as the management felt that fewer ads were sufficient in the holiday season. Other selling expenses excluding advertising was 33.4% of revenue. This was slightly higher because of expenditures related to the UK launch and other operating expenses.

The company has a stable balance sheet. Cash at the end of the 2Q FY19 was $167.5 million. The company has no debt.

Mark Mahaney, at RBC Capital raised the price target to $52. “Our concern last quarter was with the outlook for moderating growth in active clients,” Mahaney wrote. “We now see a near-term outlook for stable or even accelerating active clients. More important, we are increasingly impressed by the consistency of Stitch Fix’s financial results.”

Outlook: The Company has raised the revenue target for FY 2019. It now expects revenue in the range of $1.53 billion to $1.56 billion which is a growth of 25% to 27%. Revenue grew 26% in FY 2018 and 34% in FY 2017. The next quarter adjusted EBITDA might be negative due to the UK launch. However, in the 4Q the adjusted EBITDA will return to positive. UK revenue will impact FY 2020 revenues.

Risks: The Company’s valuation is very high. The revenue growth rates have been very high in the past and any slowdown the stock will be under selling pressure. The company could face competition from other online retailers. A lot would depend on active clients spending.

Conclusion: This is a high growth stock. The company is eyeing the vast US Apparel, Footwear and Accessories Market. However, valuation is high as it currently trades at P/E ratio of 74.41 and price to book ratio of 10.02.

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