Wall Street Is Signing Up For Stitch Fix

Online personal styling company Stitch Fix Inc SFIX reported fiscal second-quarter results that came in better than expected and prompted two analysts to turn incrementally bullish on the stock.

The Analyst

RBC Capital Markets' Mark Mahaney maintains an Outperform rating on Stitch Fix with a price target lifted from $39 to $52.

KeyBanc Capital Markets' Edward Yruma maintains at Overweight, price target lifted from $38 to $40.

Stitch Fix was trading higher by more than 26 percent at $34.03 per share Tuesday morning.

Strong Results

Stitch Fix's revenue beat came from strong performance across women's, men's and kid's categories, Mahaney said in a research report. Margins of 44.1 percent were also better than the 43.1 percent expected due to a decrease in inventory reserve and clearance expenses.

The analyst said active clients during the quarter were "somewhat better than expected" at 2.96 million versus expectations of 2.95 million. Management guided for a stable net active client growth rate compared to last year, which serves as an offset to the 31,000 net adds in the second quarter which represents a record low.

Annual revenue per client grew in the reported quarter by 6 percent year-over-year to $463 due to stronger personalization, higher quality long-term customers and strong results from Style Pass and Style Shuffle.

The earnings report marks the eighth consecutive quarter of a mid-20 percent year-over-year revenue growth and management's outlook implies the potential for a modest acceleration, Mahaney said.

'Happy Customers'

Stitch Fix's report signals it's benefiting from "happy customers" as the company realized the third consecutive quarter of revenue per active client growth, Yruma said in a research report. The company added 30,000 new clients in the quarter, which exceeded expectations of around flat. Another metric which highlights customer satisfaction is the highest keep rate (percentage of items customers keep) in the quarter.

Stitch Fix has multiple initiatives that can help sustain a 20-percent growth rate, the analyst wrote. These include expanding into the UK possibly earlier than previously expected, a focus on men's and children's categories as long-term growth drivers and expansion of Style Pass and Extras.

The company started a new inventory optimization plan that analyzes inventory preferences of every customer in the queue instead of each individual customer one at a time, Yruma said. As management improves the algorithm and expands its use outside of the women's category, the company should see further improvements to its business.

Related Links:

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Photo courtesy of Stitch Fix.