Is Stitch Fix Stock A Buy?

Stitch Fix Inc (NASDAQ:SFIX) is one of the more stable companies to rise from the subscription service craze of the 2010s. It separates itself from the pack with algorithms that act as a personal stylist with each delivery to its 3.76 million customers.

You may be sold on its clothes, but is Stitch Fix stock a Buy?

Its 2017 IPO investors remained largely unimpressed with SFIX. After worldwide shutdowns, and a $1.6 billion valuation, StitchFix grew to over $7.0 billion during the holiday season. Its performance through the year lagged because it’s both a technology and apparel company.

So, while technology stocks soared, Stitch Fix found itself stuck as people stayed home and needed fewer clothes. But the apparel industry has an upside, as the U.S. Census Bureau reported a 30 percent year-over-year increase in the category’s 2020 holiday season.

And although it may not have the growth investors expected out the gate, it steadily added about 10 percent to its customer base each month throughout the sluggish economy. As brick-and-mortar continues to drain both brands and retailers, this platform and business model could change the way we shop for clothes.

Let’s try Stitch Fix on for size to see if it will leave investors itching for profits or if it can weave through the obstacles to create a big win.

Stitch Fix Is A Popular Personal Styling Service

Stitch Fix is a personal styling service that started in 2011 during a subscription box delivery wave. Companies founded in the timeframe include Birchbox, Dollar Shave Club, Harry’s, Plated, Blue Apron, and Loot Crate. Even Postmates and DoorDash spawned from this era.

Each provided a different product but the same basic subscription model. Subscription services came and went since, but those mentioned above remain because they provided more than just the products.

These services often have different purposes – sometimes the boxes are filled with food or products that couldn’t be sold otherwise in a particular region. Other times, they connect brands to customers through product samples.

Stitch Fix does partner with brands for its curated clothing collections. But the foundation of the company is in its technology. The company works with professional stylists and collects data from its over 3 million customers. This data is fed into its machine learning platform to create the perfect clothes for each customer.

As it evolves, this platform could be worth more than the sales revenue itself. Clothing brands often spend hundreds of millions of dollars or more to find which designs will sell the most. By testing products through these boxes, brands could create lasting impressions even after they cancel Stitch Fix.

This makes it both a sales and marketing platform.

Is Stitch Fix Stock A Buy?

Stitch Fix share prices fell to a 52-week low of $10.90 during the stock market crash, only to jump back over $70 by year end. It fell again by the end of the year and then once again jumped in the new year.

Its revenue continues to rise into the 2021 fiscal year too – in the first fiscal quarter, it reported revenue of $490 million, a 10 percent year-over-year increase from FY2020. Management forecasts call for sales growth between 20 and 25 percent.

The company’s worst quarter was a 9-percent year-over-year rise in the third quarter of its 2020 fiscal year (ending May). It quickly fixed this to generate revenue growth in the next two quarters, and many believe it could become a lifeline for struggling apparel brands.

As the economy recovers, people will inevitably need to dress the part. Students, graduates, and unemployed populations seeking work will all need clothing to return to normal after gaining or losing quarantine weight.

Its customer growth rate means more corresponding revenues, as it has a sticky rate of return customers. It’s also priced at only 3.5 times trailing 12-month earnings – that makes it a value for either apparel or tech if it continues this growth rate.

But the future is cloudy, and recovery could take a long time.

Risks Of Buying Stitch Fix Stock

Stitch Fix has a great ecommerce platform and distribution model, but there’s no guarantee brands won’t inevitably push their own when they see the success.

The fallout from the pandemic already pushed retailers and clothing brands to push harder on their e-commerce presences to make up for declining sales in physical stores.

This puts Stitch Fix in competition with the very brands it serves. It’s not necessarily a bad thing, but it could limit future growth potential.

And there’s the risk of the economy recovering in a different way than the market. As economic restrictions stretched on, it became more clear recovery would take much longer than anticipated. This leaves a smaller market for more competitors to compete.

Can Stitch Fix Competitors Win?

Besides individual clothing brands and massive ecommerce sites, Stitch Fix has competition in its exact lane.

Trunk Club, Wantable, and Threadlab all have active subscriber bases in personalized style subscriptions. And more come and go every day in this brutal market.

Although Stitch Fix has the problems, its proprietary clothing brand (which is white-labeled from Asia) could help it make up for any lost revenues and keep customers happy.

Is Stitch Fix Stock A Buy? The Bottom Line

Stitch Fix is one of thousands of subscription services that popped up in the 2010s to service every consumer’s tastes.

This fashion-based box uses machine learning to match the right clothes to the right person. It grew its customer base even during global lockdowns, despite working in a crippled apparel business.

The company’s steady growth rate through the 2010s gives investors a good feeling about its potential to continue in the 2020s. And the potential gains could be further lifted if the platform proves profitable for struggling clothing brands.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.