A first look at Stitch Fix; New Year's Eve in Cape Town
Over the past two days, I attended the annual ICR conference in Orlando, Florida and wrote about the first five companies I saw there in yesterday's e-mail.
Picking up where I left off, today let's take a look at one of the most intriguing companies I saw: clothing retailer Stitch Fix (SFIX)...
It has a unique business model that doesn't involve shopping at a brick-and-mortar location or online store.
Instead, you fill out details about your size, budget, and clothing preferences on its website. Stitch Fix then uses AI and a human stylist to pick a handful of items and mail them to you as often as you wish: every two to three weeks, monthly, every other month, quarterly, or on demand. Then you select which items you like, only pay for what you keep, and mail the rest back.
Despite the novel idea, the stock has been a disaster...
From its IPO in late 2017 through the early days of the pandemic, it hovered around $25 per share. Then it got caught up in the meme-stock craze and peaked at $106.41 on January 27, 2021.
But it crashed by more than 95% over the next 18 months and has traded in the $2-to-$5 range ever since, as you can see below:
Next, let's take a look at the financials...
Stitch Fix grew rapidly from 2016 to 2021 and was profitable through 2019. But as it pushed for ever-higher growth to satisfy Wall Street, losses piled up in 2020 and especially 2022, which led to the stock's collapse (along with the bursting of the meme-stock bubble):
Since 2022, the company has been in survival/turnaround mode, cutting unprofitable business lines and customers. This has resulted in revenue dropping 41% from its peak, but also a steady narrowing of losses.
As you can see in the above chart, revenue actually grew 7% in the most recent quarter. And losses have stabilized to a mere $6 million to $8 million the past three quarters.
The cash-flow statement shows a better story. After big free-cash-flow ("FCF") losses in 2020 and 2022, the company has been consistently FCF positive since then, with the exception of two seasonal quarters.
The company eked out $5.7 million of FCF in its latest quarter. Also note in the chart below the low level of capital expenditures ("capex"), a big advantage over traditional retailers:
Stitch Fix has managed to hang on to much of the $120 million in cash it raised in its IPO. So it maintains a healthy balance sheet, with $157 million of net cash currently:
On the capital-allocation side, there's only one story: misguided share repurchases at the exact wrong time to try to prop up the stock as it peaked (it drives me crazy how many companies do this):
Turning to valuation, at yesterday's closing price of $5.51 per share, Stitch Fix had a $739 million market cap. And subtracting the net cash, it has a $582 million enterprise value ("EV").
With trailing-12-month revenue of $1.29 billion, it's trading at an EV-to-revenue ratio of 0.45 times. That's a low multiple for a traditional retailer, and it's especially low for an asset-light online one.
As for its earnings multiple, that's harder to determine because there are only two analysts who follow the company. They project a loss of $0.20 per share this year, narrowing to a $0.08 loss next year.
But I think time is working in investors' favor here. This business has established a nice – albeit small – niche, has plenty of cash, and is FCF positive, so it isn't going away. This removes most of the downside.
In the meantime, plenty of good things can happen: The adoption of AI can lead to lower customer-acquisition costs and the ability to provide more targeted clothes that customers keep, revenue can continue to tick up, and the company's net income can turn positive. Plus, I could see this being a tasty, tiny acquisition target for any number of buyers.
But I'm not recommending the stock yet – I first want to try out the service. I just signed up yesterday and am looking forward to receiving my first box of new clothes to check out. I'll let you know what I think!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Continuing my series on my recent trip to South Africa with my parents...
On December 31, we flew from Durban to one of my favorite cities in the world, Cape Town, and went out on the boat to watch the New Year's Eve fireworks display:
