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Editor's Note: Our Retail team consisting of analysts Brian McGough, Jeremy McLean, and Bradley Jamison added Stitch Fix (SFIX) as a best idea short on 2/20/21. Below is a complimentary look at some of their research on the company. If you are interested in learning more about their Retail Pro research product click here. |
HERE'S A LOOK AT WHAT HAPPENED TO SHARES OF Stitch Fix
HERE'S WHAT OUR RESEARCH TEAM wROTE ON 2/20
When Stitch Fix went public in November of 2017 it was largely viewed as a broken IPO. Priced at $15 – well below the range of $18-$20. What people did not realize at the time is that the model as it existed in 2016/17 was the best that SFIX had to offer.
The company captured the sweet spot of its TAM at ~1.5mm customers, who were spending $550-$600 with SFIX per year. The core customer here is someone who needs style advice, and is comfortable paying for a shipment (or a ‘Fix’) of apparel sight unseen, but curated for them specifically by extensive algorithms combined with (live) stylists.
Keep what you like, send the rest back. If you send it all back you pay $20. Gross margins were 45-46%, and importantly its customer acquisition cost (CAC) was at trough levels of ~3% of revenue. The company turned its inventory at 18x, which is like lightning in a bottle for a retailer (apparel asset turns generally range between 3-4x), and it generated 60% return on capital and 80% ROE.
The company had just earned $1.47 per share in 2016, though the fact that CAC was rising in 2017 and therefore pressuring margins scared people in what was a very different market than what we’re living in today. Goldman got paid on the deal, but better advice would to have been to not go public at all. We think it’s headed back to its IPO price, and then lower.
HERE'S WHAT OUR RESEARCH TEAM WROTE yESTERDAY (12/7)
SFIX keeps demonstrating why it is a Best Idea Short. Our call back in February with the stock at $79.62 was that the new Direct Buy initiative would turn this company from a niche subscription model to a typical retail model and have a dramatic negative impact on the company financials and ultimately the multiple of the stock.
The call has played out faster than we would have thought with the implementation of Direct Buy (now known as Freestyle) having as much of a dilutive impact on the overall model as we expected while also displaying clear cannibalization on the core Fix business. On top of that, the initiative is underperforming expectations.
After the massive selloff in the past few weeks, we moved SFIX a few notches lower on our Best Ideas Short list earlier this week expecting the company to put up a beat on this print given the bloated 70% inventory rate it ended last quarter. As we anticipated, revenue and EPS beat on unanticipated strong gross margins with EBITDA more than 2x the consensus. Despite the slowing revenue trends, that would be good enough for a squeeze… until you see the guidance.
Customer growth has stagnated and SFIX is expecting a material sequential drop in customers for 2Q. 2Q revenue is being guided down 12% and the full year is being revised to HSD growth while the street was expecting mid to high teens.
The revenue shortfall is being credited to lapping the referral program of 1H 2021, lower marketing as the company tackles IDFA, and lower fix conversion rates with the company testing onboarding experiences.
If you are interested in learning more about our Retail Pro research product click here.
