A deeper dive on Stitch Fix

Today, let's take the next step with my fresh look at Stitch Fix (SFIX)...

In yesterday's e-mail, I analyzed the clothing retailer again. I concluded that "any way you look at it, Stitch Fix appears to be very cheap" – with the stock down 61% since I had last discussed it in late January.

That said, I also raised the important question of whether Stitch Fix is a melting ice cube – which would therefore make its stock a value trap.

So, picking up where I left off yesterday, let's get a better picture of what's going on with Stitch Fix to make a more informed call on the stock right now...

I focus on the fundamentals, so let's take a look at Stitch Fix's fiscal fourth-quarter earnings report from last Wednesday. As I noted yesterday, the release sent the stock crashing by 22% on Thursday to close to an all-time low – down 98% from its January 2021 high.

The fourth quarter was actually decent – in line with the past couple of years. Revenues rose 4.2% year over year ("YOY") to $324.4 million, as active clients fell 1.4% to 2.3 million. That was offset by a 7.8% increase in revenue per client to $592.

And net loss narrowed to $2.1 million, or a loss of $0.02 cents per share – better than the expected loss of $0.06.

What really tanked the stock, however, was tepid guidance...

Due to certain one-time factors, as well as "a more challenging consumer environment and a lower active client starting point," the company now expects first-quarter revenue to be $323 million to $328 million – far below expectations of $361 million.

It also expects adjusted EBITDA of $3 million to $6 million next quarter – down significantly from this quarter's $10.8 million.

Guidance for the full year is somewhat better, with the company expecting revenues of $1.31 billion to $1.36 billion – modestly below the $1.4 billion estimates.

But the adjusted EBITDA guidance of $27 million to $42 million is far below expectations of $60 million. That's due to "strategic investments in advertising and technology, including artificial intelligence, to support long-term growth."

Importantly, the company said it "expects to generate positive free cash flow for the full year."

For insight, I turned to two of my friends who own the stock. The first is Mark Spiegel of Stanphyl Capital, who gave me permission to share an excerpt from his forthcoming September monthly letter to his investors:

New to the fund this month is a long position in Stitch Fix (SFIX), a cash-flow positive, approximately revenue-flat (neither growing nor shrinking) online clothing retailer that uses a combination of AI and human stylists to suggest purchases for customers. At our blended cost basis of $2.62/share, we paid an enterprise value of less than 0.1x revenue (using the midpoint of management's full year guidance) for this cash flow-positive, 43.5% gross margin company that has $1.65/share in cash and no debt. In my experience, this is the kind of business that either goes private or gets acquired for its data and customer base by a strategic investor (perhaps one of the agentic AI companies), as it represents a great deal of cash-flow positive revenue for very little money.

He added in an e-mail to me:

I started buying SFIX early this month in the $2.80 range just before earnings, then added a lot in the post-earnings crash at $2.11.

Look at the enterprise value [EV] to revenue on it now in the context of that 43% gross margin! I think it will likely be bought by a larger clothing company whose stock will benefit from acquiring Stitch Fix's revenues at such a low multiple.

My other friend wishes to remain anonymous, posting his pitch for the stock on Value Investors Club using the handle "baileyb906" on June 30, when it was at $4.11. He introduced the stock by writing:

Stitch Fix is a company that went public in 2017 with long-term growth expectations that were too high and an exaggerated and unrealistic definition of its TAM [total addressable market]. It's an example of an internet-enabled business model that was very popular at the time but has largely fallen by the wayside: the subscription box...

I was a big bear on this stock for years, not because I didn't believe data could be used to make the online clothing shopping process easier, but because the talking up of the TAM ignored the fact that a lot of people actually enjoy shopping for clothes, especially women. Whether it is in store, or online using home as the dressing room, or heading for a treasure hunt in TJ Maxx, a lot of people like shopping, particularly women. This I thought would limit the TAM for this business.

But he reversed his view on the stock because now the company is better managed and the stock's valuation is much lower:

Quite a bit has changed since 2018. First of all, the EV of the company now is about $325 million versus $1.8 billion then, with sales about 10% higher. The company trades at an EV/sales below 25%, which in my experience means that the company is either going to go under or eventually be a pretty good investment. Consumer names don't stay [at] 25% EV/sales forever – things typically either get much better or much worse.

Also, the company has meaningfully improved operations over the last three years since CEO Matt Baer joined the company. Over the past few years, Stitch Fix has expanded its assortment (adding athleisure, shoes, accessories, etc.) and its range of price points and brands. This allows it to go for share of wallet with its [customers] and offer a better experience to the high value cohort who really want a "do it for me" approach to personal styling.

He argued that "there are early signs of a turnaround here," among them:

• In Q1 of 2026 (ending last October since this company's year-end is in July), year over year revenue growth turned positive for the first time in a long time and it has been positive in the first three quarters of this year. Revenue growth was 7% in Q1, 9% in Q2, and 5% in Q3 this year. Stitch Fix guided to about 5% in Q4. Usually companies with EV/sales below 25% have negative topline growth. Not here.
• [Average order value] has grown for 11 straight quarters, which is evidence that active customers are finding value in the service.
• Revenue per active client was at an all-time high of $578 in the recently reported 3Q26, which again points to satisfied clients (now they just need more of them).
• A new CEO came in three years ago with experience in the digital divisions of Macy's and Walmart and has brought both discipline and imagination to the company.

He also noted that AI and better ad targeting will help Stitch Fix:

The other thing that has happened in the last eight years – and especially the last two years – is AI and machine learning have gotten much better. This helps Stitch Fix, always a data-first company, in several ways. First, better use of data can help with personalization, fit and fashion preference prediction, and generally help lower return rates. AI can also enhance the customer experience. Stitch Fix has seen a lift with shoppers that actively use its Vision feature, which generates images of the user/shopper in the clothing items he or she is considering.

Also, just as importantly, ad targeting online is so much more sophisticated than it was eight years ago, which opens up the possibility of using a rifle approach to marketing versus a shotgun, wide net, top of funnel effort – which generally is less efficient when it comes to [customer acquisition cost] and suppresses profitability.

He concluded:

So versus 2018, when I hated the stock, you have a more prudent and experienced leader, low expectations, and a low valuation. You also have a net cash balance of $229 million, approximately 40% of the market cap. The company is free cash flow positive. So time is on your side...

Let's be clear – this is a speculative idea and should be sized accordingly. But historically, an interesting juncture to get involved in a turnaround is when either revenue growth or EBITDA goes from negative for a long time to finally positive. You combine this inflection point moment with a solid balance sheet, free cash flow positive business operations, and a valuation that projects nothing positive is going to happen, and I think the risk is pretty limited and relative to the reward that could await you if this company finally gets it right. It doesn't have to take over the world.

When it was at $2 billion in revenue, it traded at 2.7x sales. If this company could grow sales by 20% over 3 years – which seems doable and traded at just 60% of sales like a mature mall-based retailer (an undemanding valuation), the stock would be $7.25 versus the current quote just above $4.

I think my friend's write-up is well done, but he sure got this part wrong: "the risk is pretty limited," as the stock has lost nearly half its value.

But his loss might be our opportunity. I like nothing better than hearing a compelling pitch for a stock – and having the opportunity to buy it at half price!

I checked in with my friend yesterday for an update, and he replied:

I'm a happy customer. I would say 80% of the items they have sent actually fit me, is a high hit rate, and they have also done a great job curating items that will fit someone as short as I am.

I have bought several items using their Vision AI service which puts the clothes on a generated image with my height, shape, hair color, complexion, etc. and my keep hit rate on those is quite high: 8 of 11.

This is consistent with my experience as a customer. As I wrote in my January 26 e-mail, I like the clothes they sent me and kept all five items – though I've suspended the service because I have too many clothes. (I will happily wear the same clothes for many days – much to my wife's annoyance. She says I stink, but I think I smell just fine!)

As for the stock, my friend wrote:

Even if revenue is flat, as the company guided, they should be EBITDA and free-cash-flow positive. It sucks to be down almost 50% in this (small) position, but at 10% of sales and 3.5x EBITDA, I'm not selling and might even add. It's like a call option at this valuation.

I think my friends are right that the sell-off in Stitch Fix's shares is overdone and the stock is an interesting speculation... meaning it should be sized small.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. I'm running the New York City Marathon on November 1 for three reasons: It's an amazing experience (I ran it last year and in 2015)... to raise money for Robin Hood, New York's incredible poverty-fighting organization (you can support me in my cause here)... and to prove I'm still young, as November 1 is my 60th birthday!

Last year, despite only deciding to run the marathon 12 days beforehand, I broke four hours by six seconds. So this year, with a full year to train, I'm shooting for 3:45.

I ran my last training race last Saturday – 10 miles in the Bronx, starting and ending at Yankee Stadium. I felt good the entire race and kept up a steady pace of 7:35 per mile (which is fast for me). I finished in 1:16:13, which was in the top 16% overall and in my age group of men 55 to 59 years old.

I asked Claude AI how my time projects to a full marathon, and it replied:

The Riegel formula (the standard race-time predictor) predicts a time of ~3:31:40, about 8:04/mile. Two caveats worth keeping in mind: the marathon number is the aspirational version. It assumes you've done the long-run volume to hold pace past mile 20. Runners who jump from 10-mile fitness to a marathon without that base typically finish 10-20 minutes slower than the formula says. If you're eyeing a sub-3:30, that's within reach on this fitness – it needs about 8:00/mile, so roughly four seconds faster per mile than the prediction.

I'd be shocked if I could maintain an eight-minute pace for 26.2 miles to hit 3:30. But I'm hopeful I can do an 8:34-per-mile pace and achieve my goal of 3:45.

Here are some pictures from the Bronx race: