Stitch Fix (SFIX) reported strong quarterly numbers after the close on Monday, continuing my belief in the trend of big-box and niche retailers having the eye and wallet of the consumer. The online, personalized subscription clothes provider posted flat earnings per share on $444.8 million in revenue, as Wall Street analysts expected a loss of $0.06 on $441 million in revenue.
In terms of what worked and what didn't, you'd be hard-pressed to find something that wasn't clicking for Stitch Fix in the first quarter of fiscal year 2020 (July).
Check out these results for the quarter:
Revenue grew 22% year over year.
Active clients grew 17% year over year to 3.4 million.
Gross margins hit 45.3%, significantly higher than the 43.7% to 44.5% in FY 2017 and FY 2018.
Adjusted EBITDA was $17.3 million
Free cash flow was $20 million.
Second-quarter revenue guidance was higher by 21-23% year over year.
FY 2020 revenue guidance of $1.9 billion-$1.93 billion, is higher by 23-25% on a 52-week comparison.
FY 2020 adjusted EBITDA guidance is $93 million-$107 million.
It's no secret, Stitch Fix is a name I've liked through the ups-and-downs of its public life, but things appear to be clicking. The company continues to add new categories, expand geographically, and offer new ways to buy.
Management is excited by the promise of the company's new direct buy offering. This allows clients to select and purchase items outside of a FIX, which is the subscription-based model using either the website or the mobile application. Moving forward, Stitch Fix plans to adjust personalization services so they can be accessed in more flexible ways.
The Shop Your Looks program, still in beta, may be the most exciting thing coming from the company. Rather than showing every available product, Shop Your Looks is hyper-curated and personalized to reduce the paradox of choice. In trading, this would be similar to paralysis by analysis.
Consumers can be overwhelmed by choice. Stitch Fix uses data to show consumers what they believe they will like most. Given the lower return rates on Shop Your Looks, management believes it is working. Add in the fact this program features existing inventory, it's an added benefit for inventory and management.
Additionally, the company is offering a Shop Your Colors program that enables clients to buy previously purchased items in new colors, prints, and sizes. This could be huge for the kids as market, but should also find a home with adults. Shop Your Looks is available to around one-third of the U.S. women's market, but will be expanding, while Shop Your Colors is available to all.
Unfortunately, while the fundamentals appear great, the technical picture is a bit riskier. The large short interest could easily squeeze the stock to $32.50, but bulls will need a close this week above $27.50.
The overbought and flattening nature of the Full Stochastics indicator have been a red flag in the past year. We haven't seen a bearish crossover yet, so it remains a yellow flag, but if that were to cross lower, then we have to watch for a pullback into the $23.40 to $25 range. A bearish crossover in the StochRSI would be a second trigger.
I do believe a pullback would be a terrific opportunity to own Stitch Fix or add to this name. In the same breath, I'd be a buyer over $27.50 on a closing basis this week.
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