Personalized clothing company Stitch Fix (NASDAQ:SFIX) reported Q3 CY2024 results exceeding the market’s revenue expectations, but sales fell by 12.6% year on year to $318.8 million. On top of that, next quarter’s revenue guidance ($295 million at the midpoint) was surprisingly good and 4% above what analysts were expecting. Its GAAP loss of $0.05 per share was 64.5% above analysts’ consensus estimates.
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Stitch Fix (SFIX) Q3 CY2024 Highlights:
- Revenue: $318.8 million vs analyst estimates of $306.9 million (12.6% year-on-year decline, 3.9% beat)
- Adjusted EPS: -$0.05 vs analyst estimates of -$0.14 (64.5% beat)
- Adjusted EBITDA: $13.49 million vs analyst estimates of $7.23 million (4.2% margin, 86.6% beat)
- The company lifted its revenue guidance for the full year to $1.16 billion at the midpoint from $1.14 billion, a 2.2% increase
- EBITDA guidance for the full year is $30.5 million at the midpoint, above analyst estimates of $21.58 million
- Operating Margin: -2.8%, up from -7.9% in the same quarter last year
- Free Cash Flow Margin: 3.1%, down from 4.6% in the same quarter last year
- Active Clients: 2.43 million, down 555,000 year on year
- Market Capitalization: $570.4 million
“Our fiscal year is off to a strong start. We exceeded our expectations in the first quarter on the top and bottom lines,” said Matt Baer, Chief Executive Officer, Stitch Fix.
Company Overview
One of the original subscription box companies, Stitch Fix (NASDAQ:SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.
Apparel and Accessories
Thanks to social media and the internet, not only are styles changing more frequently today than in decades past but also consumers are shifting the way they buy their goods, favoring omnichannel and e-commerce experiences. Some apparel and accessories companies have made concerted efforts to adapt while those who are slower to move may fall behind.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last five years, Stitch Fix’s demand was weak and its revenue declined by 4.9% per year. This was below our standards and is a sign of poor business quality.
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Stitch Fix’s recent history shows its demand has stayed suppressed as its revenue has declined by 18.3% annually over the last two years. 
Stitch Fix also discloses its number of active clients, which reached 2.43 million in the latest quarter. Over the last two years, Stitch Fix’s active clients averaged 17.4% year-on-year declines. Because this number aligns with its revenue growth during the same period, we can see the company’s monetization was fairly consistent. 
This quarter, Stitch Fix’s revenue fell by 12.6% year on year to $318.8 million but beat Wall Street’s estimates by 3.9%. Company management is currently guiding for a 10.7% year-on-year decline in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to decline by 12.2% over the next 12 months. While this projection is better than its two-year trend, it's tough to feel optimistic about a company facing demand difficulties.
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Cash Is King
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Stitch Fix has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.1%, lousy for a consumer discretionary business.
Stitch Fix’s free cash flow clocked in at $9.95 million in Q3, equivalent to a 3.1% margin. The company’s cash profitability regressed as it was 1.5 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.
Key Takeaways from Stitch Fix’s Q3 Results
We were impressed by how significantly Stitch Fix blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also excited it raised its full-year revenue and EBITDA guidance. Zooming out, we think this was a solid "beat-and-raise" quarter. The stock traded up 17.8% to $5.42 immediately after reporting.
Sure, Stitch Fix had a solid quarter, but if we look at the bigger picture, is this stock a buy? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
