Stitch Fix Keeps Loyal Following Despite Stock’s 50% Slump

(Bloomberg) -- A sagging stock price hasn’t scared off Stitch Fix Inc. investors who are betting that the clothing-subscription company can continue to take share from traditional retailers.

The majority of Wall Street analysts still have buy ratings on the stock despite a decline of more than 50% from record levels in September 2018 that’s wiped out $2.5 billion in market value. Hedge funds now account for 28% of outstanding shares, up from 23% at the start of the year, according to data compiled by Bloomberg.

“As a market share gainer and product innovator leveraging personalization, SFIX is strengthening its position within apparel, making it increasingly defensible,” wrote SunTrust Robinson Humphrey analyst Youssef Squali, referring to the company by its ticker symbol. He’s one of eight analysts tracked by Bloomberg who have a buy rating on the stock.

Stitch Fix faces a key test when the retailer reports fiscal first-quarter results on Monday afternoon. Investors will be looking for the number of active clients along with progress on its U.K. expansion and new direct purchase program. Stitch Fix shares gained as much as 7% ahead of the report.

The San Francisco-based business founded in 2011 has capitalized on the shift from brick-and-mortar stores to online shopping. The service sends customers a box of clothes based on a personal style profile. Customers are charged a $20 styling fee that is applied as a credit to whatever they keep from the shipment, and they can return whatever they don’t like. Men’s and women’s clothing ranges from $25 to $500, while children’s items start at $10. Customers get a 25% discount if they keep the entire box.

Traditional clothing retailers have seen traffic shrink for several years, while new entrants like Stitch Fix are growing, according to Bloomberg Intelligence analyst Poonam Goyal. Analysts estimate Stitch Fix sales will expand 22% in fiscal 2020. While that’s down from 29% growth in 2019, it far exceeds the performance of many traditional retailers. Average revenue growth for the 21 companies in the S&P Supercomposite Apparel Retail index is expected to be 6% in 2019.

“The store-based retailers, traffic has been down in the high single digit range year after year for several years now and they’re struggling to compete with newer entrants and more digitally savvy, digitally native retailers,” said Goyal.

To be sure, there are plenty of people betting against Stitch Fix. More than 45% of shares available to trade are on loan to short sellers, according to data from financial analytics firm S3 Partners.

Critics say subscription services aren’t a tough concept for other retailers to emulate. Some brands are already doing that, like Nike’s sneaker club for kids, Goyal said. Needham & Co. analyst Rick Patel questions whether Stitch Fix’s momentum in active client growth can continue with larger retailers boosting promotions entering the holiday season.

SunTrust’s Squali said he isn’t deterred by the high short interest as Stitch Fix offers one of the best risk-to-reward profiles in the small and medium-sized capitalization internet sector.

To contact the reporter on this story: Jarrell Dillard in New York at jdillard11@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Catherine Larkin, Jeran Wittenstein

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