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Stitch Fix share price struggles amid lower earnings forecasts

The online fashion curator has had a hard time converting customers to its direct-buy venture. As a result, the company’s earnings look likely to be significantly down from 2021, which could put further downside pressure on the Stitch Fix share price.

Shares in online clothing retailer Stitch Fix [SFIX] continue to trend lower ahead of its third quarter earnings release on 9 June after the company cut its forecast for the year ending July. The company said in March that it expected earnings to be “flat to slightly down”, partially due to “softness in the number of active clients”.

Analysts forecasts for the upcoming quarter appear to be in line with those of the San Francisco-based company itself. According to Zacks Equity Research, consensus forecasts for the quarter are for a loss per share of $0.57, a further 216.6% drop from the $0.18 loss reported in the year-ago quarter. Revenue is predicted to be $491.7m, down 8.2% from $535.6m in 2021. The company’s own guidance is in a range of $485 to $500m, which would be a 7–10% decline year-over-year.

Stitch Fix, which was founded back in 2011, helps people source outfits based on their style, size and price range, working with a number of clothing brands. Its curated style boxes, which arrive in the post, are known as ‘fixes’.

In April 2021, Stitch Fix’s stock price took a blow when its founder and then-CEO, Katrina Lake (pictured), announced she would be stepping down in a shock move. It has also been hit by issues during the pandemic, such as shipping delays and customers cutting their spending.  Shares in Stitch Fix have plummeted 54.4% year-to-date to $8.63 at the close on 6 June. The stock is more than 90% off an all-time high of $106.41 in January 2021.

Conversion challenges for Stitch Fix

When Stitch Fix reported second-quarter earnings in March, trouble appeared to be brewing. It said new user growth was down to 4% compared to 11% in the previous quarter.

The company reportedly also suffered when Apple made changes to its mobile platform, making it harder for Stitch Fix to target potential customers.

While its curated boxes are its core business, its most recent commercial venture, launched in late 2021, is a direct-buy option called Freestyle. However, this has so far failed to fully take off. “While Freestyle revenue grew 29% year on year in the second quarter, we continue to experience challenges with onboarding and conversion of clients, which are not where we want them to be,” Elizabeth Spaulding, CEO of Stitch Fix, admitted in the earnings report.

However, it hasn’t been entirely bad news. Stitch Fix reported revenue of $516.7m for Q2, up 3% year-over-year, beating a consensus estimate of $514.8m, according to Refinitiv data. Spending per customer also jumped up during the second quarter to $549, a hike of 18% year-over-year. Its loss of $0.28 per share was in line with forecasts. The company has delivered an earnings beat for the previous four quarters, reporting lower-than-expected losses each time.

The company also recently announced that it has hired Debbie Rose Woloshin, a former employee at fashion giant Marc Jacobs, as its new chief marketing officer. It’s hoped she will help guide the company further as it moves into personalised direct-buying, rather than relying on a subscription model.

It’s a strategy that may or may not pay off. “What they’re aiming to do is optimise what other people already do. Being special then becomes a higher hurdle,” analyst Simeon Siegel of BMO Capital Markets told the Wall Street Journal.

Analysts rate Stitch Fix stock a ‘hold’

Stitch Fix is a completely online venture, something that helped it initially grow during the pandemic. However, elements such as increased transport costs, and the return of items, could put further pressure on Stitch Fix’s overheads. Stitch Fix has struggled to convert its retail sales to profit.

Overall, analysts appear to be on the fence about the future of Stitch Fix’s share price. In March, Jefferies analyst Ashley Helgans recommended a ‘hold’ rating on the stock, with a $10 price target. Telsey Advisory Group cut its price target from $25 to $14, while Truist Securities downgraded the stock from ‘buy’ to ‘hold’.

The 16 analysts surveyed by CNN Money with 12-month forecasts for Stitch Fix are offering a median target of $11, which would be a 27.5% jump from its latest close. The consensus among 17 analysts is to ‘hold’ the stock. A consensus of 17 analysts at TipRanks is also to ‘hold’ the stock.

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