Stitch Fix's 'Unique' Business Model Isn't Enough To Make Buckingham A Bull

Stitch Fix Inc SFIX, an online personalized styling service company, boasts a "unique" business model that "justifies its existence" but this isn't reason enough to be bullish on the stock, according to Buckingham Research Group. 

The Analyst

Buckingham's Scott Krasik initiated coverage of Stitch Fix's stock with a Neutral rating and $22 price target.

The Thesis

Stitch Fix's business combines a high-quality service and merchandising algorithms based on artificial intelligence to offer its users a "potentially better" way to shop for apparel, Krasik said in the Monday initiation note.

Stitch Fix should be able to boost its sales at a double-digit annual rate for at least the next five years, but this won't necessarily translate to margin expansion in the near term, the analyst said. 

With Stitch Fix planning to increase marketing spending as a percentage of sales from 6 percent in fiscal 2017 to a rate of 8 to 10 percent, Krasik said. 

Buckingham projects that Stitch Fix's margins will stabilize in fiscal 2020 or 2021. 

The company's expansion into men's and plus size will come with lower margin rates than its core offerings, the analyst said. 

Given a lack of conviction in margin growth in the near-term, a premium to comparable companies in Stitch Fix's stock is unwarranted, Krasik said. 

The risk-reward profile at current levels is "tilted modestly unfavorably" given a downside potential of 40 percent and upside potential of 30 percent, Krasik said. 

Price Action

Sitch Fix shares were plunging 5.22 percent to $19.34 at the time of publication Monday.

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Photo courtesy of Stitch Fix.