SFIX Earnings beat, 3.2 million active clients

Investment Analysis Clubs Saul’s Investing Discussions
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Here is the press release
https://investors.stitchfix.com/news-releases/news-release-d…

Fourth quarter highlights

Active clients of 3.2 million, an increase of 18% year over year

Net revenue of $432.1 million, an increase of 36% year over year

Net income of $7.2 million and adjusted EBITDA of $6.4 million

Diluted earnings per share of $0.07

Full year highlights

Net revenue of $1.6 billion, an increase of 29% year over year

Net income of $36.9 million and adjusted EBITDA of $39.6 million

Diluted earnings per share of $0.36

"We have built a personalization engine with incredible potential, and I’m excited to expand on our platform in new and innovative ways.” - Katrina Lake

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Here is the shareholder letter!
https://investors.stitchfix.com/static-files/ef414eda-2498-4…

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I think the reason SFIX is down right now is guidance for next quarter:

438 - 442m for Q1 (the market expected 451m on avg)

That said, guidance for the full year is exactly what was expected…although the market always reacts better to a beat than a “meet.”

The fact is, this stock probably isn’t going to go up much until the company can show better profitability:

$0.36 in the fiscal year that just ended
$0.39 in the prior fiscal year

That’s just not what the market is looking for. And with only 36% revenue growth and 20% forecast for next year, there’s not a ton of room for error. This is an uphill slog.

I just think there are plenty of better stocks out there.

Bear

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SFIX earnings look good. The full year revenue guidance is great especially when considering that they are typically conservative giving full year guidance at the beginning of the year. If you look at last year’s Q4 earnings, they guided for $1.47 - 1.53 billion, which was 20-25% higher than fiscal 2018. For fiscal year 2019, they had revenue of $1,577.6 million, a 28.6% increase year over year, so they beat their guidance handedly.

Now they are guiding for $1.90 – $1.93 billion, which is 20.5% - 22.5% growth. But if you factor in that fiscal 2019 has 53 weeks vs 52 weeks for 2020, you get normalized revenue growth of 23-25%. Most likely they will beat and have close to $2 billion in revenue this fiscal year.

It’s tough to analyze Q4 given the 14 week quarter when compared to the normal 13 week Q4. For Q1 they are guiding for revenue of $438 – 442M, which is 20-21% higher than last year. They state the following on their Q1 guidance:

We’ve planned Q1’20 softer than our full-year growth for two reasons. First, we’ve had greater success this year with summer products that carry lower average unit retails and average order values. Second, we spent less on marketing in late Q4’19, which meant we had fewer clients to contribute to revenue at the start of Q1’20. Our guidance reflects continued momentum in our revenue per client growth, which was 9% in Q4’19, and consistent client count growth, which was 18% year over year in Q4’19.

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re: profitabiilty – they launched their business in a new country this year. That costs money.

re: only 36% revenue growth – they are not a software company! They have to deal in real inventory every quarter

re: not what the market is looking for – no one is looking for a profitable company with 36% revenue growth, disruptive technology, and a growing customer base?

Karen

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The fact is, this stock probably isn’t going to go up much until the company can show better profitability:

Actually, I think that the deal with SFIX is subscriber growth.

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Actually, I think that the deal with SFIX is subscriber growth.

First of all, Stitch Fix does not describe itself as a subscription company. So we are not talking about subscribers, we are talking about the number of active clients. Clients are not required to buy anything from Stitch Fix at regular intervals. While the client can set a regular frequency, their purchases are made when they want the clothes. Katrina Lake has said that people do not buy clothes in a subscription style. (Note that Prime Stylist is doing a monthly subscription, but that is not how Stitch Fix has organized its business.)

I think the deal with Stitch Fix is that the market does not accept that they deal in real inventory, and that they are more The Litte Engine That Could, or the tortoise vs. the hare. That said, this tortoise is growing in double digits, funding their growth from profits, and has zero debt.

The market sees the clothing but not the innovation. Consider the new Shop Your Look feature, in Beta, only rolled out to a portion of women’s customers:

Through this highly personalized and curated experience, we’ve been pleased to see that over just
a brief, eight-week beta test period, over one-third of clients that purchase through Shop Your Looks engage with us multiple times, and approximately 60% of clients who buy through the offering purchase two items or more. Seeing these results demonstrates the tremendous opportunity to extend our personalization platform in new and incremental ways. We believe this direct-buy functionality has the potential to drive further engagement between Fixes, increase our ability to serve clients well and gain greater share of wallet, while also providing new entry points into our business.

Stitch Fix’s customer acquisitions are also targeted for fast payback. They don’t want just any customer, they want the valuable customers. They are not looking for growth at all costs. They want long term relationships.

Our success in acquiring high-quality clients gives us greater confidence in our marketing strategy and our ability to drive fast paybacks. One way we measure payback is by analyzing cumulative gross profit generated by a given cohort relative to advertising spent in the quarter we acquired those clients.

We determine the marketing payback ratio for a cohort by dividing their cumulative gross profit by the corresponding quarterly advertising spend. The chart below demonstrates how we continue to drive near-term payback on marketing spend and that the marketing payback ratio grows as clients
engage with us over time.

• In Q1’19, we spent $39 million on advertising to attract clients who, as of Q4’19, have already
generated $94 million of cumulative gross profit in the three quarters since they joined, reflecting
a marketing payback ratio of 2.4x.

• In Q4’18, we spent $29 million on advertising to attract clients who have generated $80 million of
cumulative gross profit in the four quarters since they joined, reflecting a marketing payback
ratio of 2.8x.

• In Q3’18, we spent $25 million on advertising to attract clients who have generated $104 million
of cumulative gross profit in the five quarters since they joined, reflecting a marketing payback
ratio of 4.1x.

• In Q2’18, we spent $20 million on advertising to attract clients who have generated $85 million of
cumulative gross profit in the six quarters since they joined, reflecting a marketing payback ratio
of 4.3x.

Karen

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I have to re-characterize my tortoise vs the hare description. I think that comparing Stitch Fix to software companies is completely unrealistic.

But if we compare Stitch Fix to retailers, to Nordstrom, to Macy’s, to Lululemon, to all the others, they will look like the hare.

It depends on your lens.

Karen

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One of the most interesting things to me is that Stitch Fix plans to invest in more data scientists and top quality leadership. They cite this as a competitive advantage and plan to keep hiring world class leaders

It sounds expensive, but I like it.

Note that they already have 200 engineers and 125 data scientists on the team. (And I get the impression that they hire a lot of females in these roles too.)

now that we’ve been a public company for two years, we look back, we’re very proud of the capabilities we build, the competitive note we built on personalization. And what underpins that is talent. And as we looked and planned out 2020, we knew that we had an opportunity to continue to widen that moat, not only to continue to hire and retain great data engineering and data science and engineering talent, but also hire world class leaders. And that translated into our SBC guidance of $5 million for the year.

I also like that Stitch Fix men’s is now up to 4 warehouses and kids’ is up to 2 warehouses. They don’t break out the numbers for these categories, and Kids’ is only one year old.

Yes. We continue to be really excited about Kids, product market acceptance with all of our clients, boys and girls with a wide range of ages continues to be very strong. We continue to learn that we can develop great product on the existing brand side and have a phenomenal market brand business. Our team is really strong and I think the combination of existing brands and market brands and the product acceptance and the strength of the team gives me a lot of confidence that sort of when I was GM of Men’s, we had this very good glide path expectations of gross margin and where we would land. And I’m seeing the same thing in Kids.

Karen

Link to Fool earnings call transcript:
https://www.fool.com/earnings/call-transcripts/2019/10/01/st…

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I have to re-characterize my tortoise vs the hare description. I think that comparing Stitch Fix to software companies is completely unrealistic.

But if we compare Stitch Fix to retailers, to Nordstrom, to Macy’s, to Lululemon, to all the others, they will look like the hare.

In Aesop’s fable it’s the tortoise that wins the race…

https://www.oxfordlearnersdictionaries.com/definition/englis…

It depends on your lens.

Despite Aesop, I look at the Stock Price Races. Since going public they have been hare like!

http://softwaretimes.com/pics/sfix-10-02-2019.gif

Since going public LULU lapped them, SFIX is next to last, and M is a has-been. I used to be a fan of Emerging Retail and even started a board which was closed for lack of activity after a nice 10 year run.

https://discussion.fool.com/my-goodness-dennylast-post-here-on-n…

I watched several SFIX client videos and they certainly are an emerging retailer with an innovative business model perfectly suited to the personalized internet. Amazon’s retail business is the WWW equivalent of Big Box despite their efforts to personalize it. Stitch Fix is the WWW equivalent of a personalized boutique. It reminds me of how Netflix buried BlockBuster. Translated, what the linked video says is that BlockBuster suffered “Innovators’ Dilemma.”

https://www.youtube.com/watch?v=4k0iCDfr3TM

It’s not Amazon or Shopify that are in Stitch Fix’s sights but bricks and mortar boutiques and absolutely forget comparing it to software or SaaS, it’s neither. It’s a new experience maybe akin to Book-of-the-Month clubs.

https://urbantastebud.com/best-book-subscription-boxes/

As for buying the stock, the good news is that it’s back to IPO level pricing, past the hype cycle’s “Peak of Inflated Expectations” where one can lose a lot of money but I don’t think the business model has definitively proven itself yet. Certainly a stock to watch.

Denny Schlesinger

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Hi Denny,

As for buying the stock, the good news is that it’s back to IPO level pricing, past the hype cycle’s “Peak of Inflated Expectations” where one can lose a lot of money but I don’t think the business model has definitively proven itself yet. Certainly a stock to watch.

What would it take (as specific as possible) for the Stitch Fix business model to be proven? I’m curious about what Stitch Fix needs to do or accomplish to win the support of more investors.

Thanks!
Karen

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With current sales of only $135/customer, one would think that a major avenue of growth would be selling more to each customer.

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So that’s for Q4, so annualized about $540 average per customer. Increasing share of wallet is something they can do! They have started new features including, Shop New Colors and Shop Your Look is in Beta, where people can buy items that coordinate with recent purchases. Stitch Fix also bought the IP of Finery, which is wardrobe management software.

How much do you spend on clothes annually? There is room for growth as Stitch Fix gets better and better at making product recommendations, and as more clothing shopping comes online, and as they deepen customer relationships.

Karen
who is wearing a pair of perfect fitting SFIX jeans today. And Stitch Fix underwear (bought through the extras program). I am pulling my weight above-average for the quarterly spend!

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I am no expert but I feel that at $540 average per customer, SFIX is flirting at upper limit of spend per customer… I know they are focused on higher end customer strata and therefore, likely they can even double this amount, but it will be over a long period of time…

in the meanwhile, they are adding new customers at <20% growth rate which is expected based on their focus on elite strata…

so what can they do - i think they are doing their best in expanding outside US… but that takes tie and only sustains their current growth rate or reduces deceleration…

its just that law of large number is catching up to them.

Only way out is to create and deliver higher quality products for the vast lower middle income group… not sure if they can get there… and not sure if that audience even wants this…

therefore, this stock is no longer in growth investors list and they are not yet making enough cash to get on value investors list… so its going to be in flunk for a while…

thats my read, anyway.

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I can’t get there on SFIX. Dealing with constant inventory, sizes, colors, trends, yikes. Never ending.

It’s not face cream, a product that once you love it you buy it over and over for the next decade, its the ever revolving seasonal fashion industry.

Then there are all those returns.

Men go shopping they pick a shirt, they try it on, if it fits they walk up to the cashier pay and walk out.

Women go shopping, they pick a blouse, they try it on, if it fits they then wonder, they doubt, they try on 20 other blouses, after 30 minutes they are down to three choices, they ask for opinions of sale people, maybe just maybe they make a choice. Oh but then they wonder about what’s at home in the closet to go with this new blouse. Do they have the right slacks? Hmmmmmm…time to try on 20 pairs of slacks.

Just seems like so much can go wrong.

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I feel that at $540 average per customer, SFIX is flirting at upper limit of spend per customer… I know they are focused on higher end customer strata and therefore, likely they can even double this amount, but it will be over a long period of time…

You might be right. But then, I belong to a Facebook Stitch Fix group where I see people spending over $100 an item. This is not everybody of course, but I recently saw a person buy a $300 dress and $100 yoga pants in the same fix. She bought all 5 items, so she got a 25% discount.

According to this article, the average clothing spend is about $150/month, so maybe you are right about the amount:
https://www.fool.com/slideshow/heres-what-average-american-s…

Stitch Fix is targeting its advertising and marketing to get the most profitable customers.

Karen

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I’m not a chartist but the chart bears out my thesis. Despite all the hopes and cheers, there are many better opportunities for your investments. Good luck all.

🆁🅶🅱
There’s battle lines being drawn …Nobody’s right if everybody’s wrong

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Men go shopping they pick a shirt, they try it on, if it fits they walk up to the cashier pay and walk out.

Women go shopping, they pick a blouse, they try it on, if it fits they then wonder, they doubt, they try on 20 other blouses, after 30 minutes they are down to three choices, they ask for opinions of sale people, maybe just maybe they make a choice. Oh but then they wonder about what’s at home in the closet to go with this new blouse. Do they have the right slacks? Hmmmmmm…time to try on 20 pairs of slacks.

Aside from the gender stereotyping, either situation is good for Stitch Fix. For those who are an easy sell, boom. Get your items, done. You didn’t have to drive to the store.

For the indecisive, you have the help of a personal shopper, and things are more likely to fit, and your choice is limited to 5 items at a time so there is greater focus.

Karen

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After quite a number of years in the men’s clothing business; growing a chain from 40 to 650 brick n mortar outlets (I was on the real estate end of that expansion); men’s clothing is the toughest retail business on the planet and the hardest customer to figure out, buy for and maintain inventory on behalf of. Basics, Basics, Basics…and for those of you not around soft goods…thats underwear, socks, tshirts and a belt, if you’re lucky. High margin stuff, but at many times in the sales cycle, that’s the men’s purchase. The vast majority of men do not shop for themselves. The vast majority of men shop very infrequently. When men shop, they are grab-n-go shoppers; at most, 2 times per year. Point being is that if SFIX is banking on growing revenue through the men’s division, good luck! [Keep in mind, I am a SFIX holder]. When men do shop, they touch, feel, try-on and then buy one of every color of the style number they like. In other words, good luck having the right levels of inventory to leverage that event, the right style nos., the right sizes, the right colors, the right seasonality. I have 3 young adult women in my household; I do not have one SFIX customer. That scares me as an investor.

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“Aside from the gender stereotyping, either situation is good for Stitch Fix. For those who are an easy sell, boom. Get your items, done. You didn’t have to drive to the store.”

When SFIX targets their advertising they are “stereotyping”. You better know your customer and know how they shop and what they like.

Men and women are very different customers and I’m sure the CEO of SFIX is well aware of the differences. If she’s not then she’s in the wrong business.

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