The Analysts Rip The Seams Out Of Stitch Fix Stitch Fix (NASDAQ: SFIX) has been an interesting growth story but one that is coming apart at the seams. The pandemic, the stimulus, and the channel shift to eCommerce that...

The Stitch Fix Growth Story Comes Apart At The Seams

Stitch Fix (NASDAQ: SFIX) has been an interesting growth story but one that is coming apart at the seams. The pandemic, the stimulus, and the channel shift to eCommerce that ensued helped to extend the company's track record but ultimately set it up for an even bigger fall. Today, after a very disappointing FQ3 report, the analyst price target reductions are rolling in and we don't think this is the end of the trend. Only the beginning. Inflation is through the roof and interest rates are on the rise which tells us discretionary spending will tank (and it is already doing it).

The 10 analysts with current coverage are rating the stock a firm Hold but this is edging lower over the past year and 90-day periods. The Marketbeat.com consensus price target is still attractive too, but don't read too much into that statement. The consensus price target of $13.53 is more than 100% above the current price action but there are two factors that make us shy away. The first is the high price target of $70 which we find to be extreme. This target was set nearly a year ago and is not relevant to today's action. The second is the post-release action. There have been 10 commentaries so far and they all include price target reductions to a range of $5 to $10. Their consensus, which we find to be very relevant, have the stock trading near $8 and we think additional target cuts are on the way.

The key takeaway from the chatter is that management's push toward freestyle shopping and general execution leaves much to be desired. In our view, this company is in peril of losing the bulk of its active clients because it is primarily a stying company, and those extra, non-essential services like "styling" are going to get cut from consumer budgets. "Friction in the onboarding process and lower conversion from the broader rollout of Freestyle continue to create headwinds to client growth," he explained. "We find the execution so far to be challenged, and opt to remain on the sidelines."

Stitch Fix Is Burning Capital

Stitch Fix had a very disappointing quarter in which revenue fell, active clients fell, margins were compressed, and losses widened. The $492.94 million in net revenue is not only down -8.0% YOY but also missed the Marketbeat.com consensus, if by a slim margin. The decline was driven by a 5% decline in active clients that was offset by a 15% increase in revenue per active client. The worst news, however, is that operating losses mounted in the face of rising costs, wages, deleveraging, and turnaround efforts. The net results are a quadrupling of the prior loss to -$0.72 per share and the guidance is no better.

The company is expecting revenue to fall high-single digits versus last year which is roughly in line with the consensus. The bad news here is that a 5% or greater contraction in EBITDA margin is expected as well. The company announced a 4% reduction in the staffing levels that should help save money next year but those results won't be fully felt until the Q1 period of F2023. In our view, Stitch Fix will have to find other ways to save money, as well as new ways to bring in revenue, and we are not hopeful. As for the Freestyle shopping, without the styling services, Stitch Fix is just another retailer.

The Technical Outlook: Stitch Fix Is Going Lower

Shares of Stitch Fix have been in a downtrend for over a year and are most likely heading lower. The price action is down in premarket trading and there is no catalyst to buy and every reason to think this business is fading away. In our view, price action in this stock is headed below $5.