Will Stitch Fix Stock Rebound?

Stitch Fix, Inc. (NASDAQ:SFIX) is a personal online styling platform that has made a name for itself in the ready-to-wear, personal styling, accessories market.

The rise in demand for online shopping and personalized styling services made it popular with consumers, especially those looking for a way to both stay at home and shop conveniently to refresh their wardrobes. But a declining subscriber base over the last several quarters has posed questions about the sustainability of the business model.

What’s gone wrong and will Stitch Fix recover?

Falling Subscribers Hurting Sales

Active clients from continuing operations for the quarter ended January 27, 2024 were 2,805,000, a 17% year-over-year decrease. This also reflects a 6% drop when compared to the previous quarter.

In 2023 the number of active clients was 3,297,000 while in 2022 it was 3,795,000, revealing a decline of 13.1%.

The main reasons for the fall off in active clients seems to be churn from existing clientele and the failure to grow new clients. Worse still, net revenue per active client was down 9% to $497 in 2023 from $546 in 2022.

While the early vision to combine data and technology to personalize client care was met with great enthusiasm, demand has since waned and now a question looms large about whether the company will see a return to prior fortunes.

Recognizing its financial plight, management announced a restructuring plan to reduce future costs fixed and variable costs. So will it work?

How Is Stitch’s Restructuring Plan Going?

The top brass has already carried out various restructuring measures to centralize key functions, enhance the decision-making process to facilitate efficiencies, and make sure as many resources as possible go to priority areas.

In FY 2022, the so-called Restructuring Plan led to a reduction of about 4% of the employee workforce, with almost 15% of salaried positions suffering the effects of the downsizing.

By January 2023, the plan had extended to layoff about 6% of the employee workforce, including about 20% of salaried employees. 

Besides the restructuring efforts, in June 2023, the company reported the planned shutdown of fulfillment centers in Bethlehem, Pennsylvania, and Dallas, Texas.

Furthermore, it entered into a consultation phase, as provided for under UK law, to discover how to exit the UK market.

By August 24, 2023, the decision was taken to wind down operations in the UK. And as of Q1 this year, all United Kingdom operations had ceased.

The restructurings have come at their own cost, which is forecasted to land between $9 million and $12 million this year. These costs are expected to be spread across the first three fiscal quarters with the highest cost expected to land in the third fiscal quarter that ended April 27, 2024.

Time will tell whether staff cost-cutting measures, the closure of two distribution centers and the UK shutdown will have a material effect on the business going forward, but short-term it should lead to margin expansion and profit growth.

Signs of Improvement Are Sprouting 

Management reported last quarter’s net revenue of $330.4 million, a decline of 18% year over year owing to the eroding customer base, but still managed to squeeze out a gross margin of 43.4%, a 250-basis-point increase versus the same quarter a year ago.

That margin expansion is key to validating management’s thesis that cost cuts are proving effective but they are not out of the woods yet. The net loss from operations was $35 million, and the loss per share from continuing operations was $0.29. So too was the free cash flow from operations negative to the tune of $26.1 million.

Last year, the company saw a 21% revenue decline compared to the prior fiscal year as active clients dropped. As the top line fell, so too did gross margin decline 160 basis points year-over-year, largely due to higher product and transportation expenses as a percentage of revenue. The net effect was to offset the improved inventory figures.

Management has forecast that net revenue from continuing operations will land between $300 million and $310 million in Q3 2024, representing a slump of between 19% and 22% versus the year prior. 

On the profitability front, adjusted EBITDA from continuing operations for the period is estimated to be within a $5 million loss and break-even.

For the current year, management expects to achieve net revenue in a range of $1.29 billion to $1.32 billion, which translates to a year-over-year decline of between 17% and 19%. The forecasted adjusted EBITDA from continuing operations is expected to be within the range of $10 million and $20 million.

Will Stitch Fix Stock Recover?

Following cost-cutting measures, analysts forecast that Stitch Fix share price will recover to $3.29 per share, representing upside potential of 52.2%.

Looking in the rearview mirror reveals the stock has been in an alarming downward trend, with a year-to-date decline of about 36%.

The unrelenting fall in share price, which is down by over 90% during the past 5 years, has led to it trading at a remarkably low multiple of just 0.20x forward sales, which is almost 78% below industry peers and indicative of real concerns about the viability of the business.

Those worries are largely justified given the company’s declining customer based and falling revenues. But management hasn’t been asleep at the wheel and has taken decisive actions to turnaround the company and return to more cheery days.

They have also backed up their actions with balance sheet reserves and enacted a management share buyback scheme of $150 million, which further signals confidence to the market.

Another positive for the company is the $227.5 million in cash on the books, which compares favorably to the absence of long-term debt. It’s clear management still has a long runway to make the company more efficient and return to profitability but the jury is out on whether a full return to former glory days will be enjoyed.

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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.