26 Sep AiroAV Reports: Stitch Fix’s Share Price Plunge Looks Overdone (NASDAQ:SFIX…
Stitch Fix’s (NASDAQ:SFIX) share price dropped 16% post-market on underwhelming 1Q21 guidance of high-single-digit growth vs. 10% consensus growth (please refer to Stitch Fix EPS misses by $0.27, beats on revenue for key earnings numbers). However, I see conservatism embedded in the guidance and an underappreciation of SFIX’s growth by the market.
Robust near-term demand points to conservatism in 1Q guidance
In July, SFIX saw a 50% YoY increase in first Fix shipment and elevated growth continue through August. Note that this growth momentum is after supply-side constraints (warehouse resumption and shifting inventory towards athleisure from formal wear) have been removed and management said this is the highest sequential first Fix growth rate in the last three years. The demand is so much that SFIX still sees some elevated wait times. Assuming 20% of SFIX’s revenue is generated from new clients and the remaining 80% is generated from repeat purchase from existing customers, a 50% YoY increase in first Fix shipment (new clients) and flat growth (a conservative assumption) in existing customers translate to 10% revenue growth ((0.8*1.1+0.2*1)-1=10%). This makes me wonder if a high-single-digit revenue growth in 1Q21 is overly conservative.
Core women’s business growth driven by athleisure and Plus
A rapid inventory re-allocation towards athleisure and plus-sized clothing positions SFIX’s core women’s business for growth even amidst the overall decline in the apparel market.
With inventory allocation shifting from formal wear towards athleisure clothing, which is the best-selling category post COVID-19, growth could surprise in the upside. Women’s activewear revenue grew by over 350% YoY across both fixes and direct buy in 4Q21, suggesting strong momentum in the core customer group.
While Plus first Fix growth exceeded 35% YoY growth on an adjusted basis, it just comprises a low-double-digit percent of women’s clients today. Given most retailers are not focused on serving the Plus market, SFIX’s try-at-home convenience combined with accurate understanding of size could easily position itself as the go-to platform for Plus clients. SFIX believes it could represent 40% of the women’s addressable market, suggesting plenty of headroom for the Plus business growth.
Direct buy innovation could be gaming changing in the long term
Multiple direct buy innovation initiatives are in place. In August shopping bag functionality was introduced to all direct buy clients. Through combining multiple items into fewer shipments, it could drive higher sales, incremental cost savings and thus margin expansion.
SFIX is also working on algorithm enhancement in FY21 to widen product discovery for both inspiration-based as well as higher intent purchases. Should this be successful, there is potential for SFIX to be an addictive shopping platform due to personalization.
In addition, direct buy is still mainly adopted by existing customers. Elizabeth said in the earnings call that SFIX will participate in search engine optimization in order to let new customers shop directly on the platform. This should result in a material expansion in total addressable market and new customer growth could be way higher than the past trajectory.
Focus on operating leverage in FY21 could trigger re-rating
As SFIX incurs additional 100-200bp in capex-to-sales ratio on top of the normal 2.0% in FY21 to increase operating capacity, growth constraints should be removed and higher operating leverage can be expected over time. Together with the roll-out of shopping bag functionality to drive margin expansion and the general increase in revenue scale, I believe we could finally begin to see operating leverage in the business after years of investment which was characterized as “not-scalable business” by bears. When the management is being asked if there is change in the long-term EBITDA goal of 11-13% in the earnings call, instead of reiterating the goal, Mike said “there’s just more tailwinds in the business that we’re seeing that gives us even more confidence about those targets”. This level of optimism suggests that operating leverage is firmly on track and a re-rating could follow.
Given the above reasons, SFIX’s 1Q21 guidance looks conservative and the long-term growth story seems underappreciated by investors. With the stock down 16% post earnings and trading at FY21 1.2x EV/Sales, SFIX looks very attractively priced on a risk-reward basis.
Disclosure: I am/we are long SFIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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