Stitch Fix's Direct Buy Option Comes At The Right Time: Deutsche Bank

Stitch Fix SFIX shares were trading higher Wednesday after Deutsche Bank analysts took a bullish stance on the online clothing styling and delivery service, saying it's benefiting from coronavirus pandemic trends. 

The Stitch Fix Analyst: Deutsche Bank analyst Kunal Madhukar initiated coverage of Stitch Fix with a Buy rating and $34 price target.

The Stitch Fix Takeaways: Stitch Fix is one of the key COVID-19 e-commerce beneficiaries as it transitions its business model away from subscriptions, while still offering personalization and apparel discovery benefits, Madhukar said in a Wednesday note.

The direct buy option is a key new growth driver, the analyst said. 

Stitch Fix plans to create a "personalized" store for every consumer where everything they see — in terms of size, color and style preferences and price range — is curated for them individually, he said. 

“In our view, this has materially expanded the addressable opportunity for the company and is coming at the right time when consumers are wanting new apparel ideas though e-commerce.”

Deutsche Bank conducted two surveys on the topic: the first in December, pre-pandemic, and another in May. 

The survey found that online awareness is high, but spending is modest.

Subscription remains a niche within online, but adoption has improved during the lockdowns, Madhukar said. Stitch Fix is the leader among subscription services, the analyst said. 

The key challenge for Stitch Fix is to change the consumer perception about it being primarily a "subscription-based" option, where the total addressable market was limited by the hesitation to enter into a recurring obligation, to an "always-on, hyper-personalized store," he said. 

Deutsche Bank's $34 price target is based on a 1.75x fiscal year 2022 revenue estimate, with expectations for the top line to grow in the low-to-mid teens; 30x adjusted EBITDA, excluding stock based compensation, with the EBITDA projected to grow more than 30% in fiscal years 2022 and 2023; and 35x adjusted EPS.

SFIX Price Action: Stitch Fix shares were trading up 7.09% at $28.49 at the time of publication Wednesday. 

The stock has a 52-week high of $30.44 and a 52-week low of $10.90.

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Photo courtesy of Stitch Fix. 

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