Stitch Fix, Inc. SFIX is displaying solid momentum on bourses thanks to its constant efforts to improve client experience. Notably, management continues to strengthen its digital capabilities, with its direct-buy service stealing the show. Impressively, this online personal-styling service company’s shares have appreciated 72.3% over the past three months, significantly outperforming the industry’s 14.6% rally and the broader S&P 500 Index’s 12.5% growth.
Stitch Fix’s direct-buy facility, which was introduced last year, has been gaining massive popularity. This integrated facility allows clients to shop and select products directly from the company’s website or mobile app with highly personalized recommendations. Management continues to expand the facility to grab higher market share. The company has also started collecting client-feedback data on shipped direct-buy items, which will further reinforce personalized recommendations.
In order to make the facility an important client-acquisition tool, the company introduced “Trending For You” in early June. This feature allows male and female clients to shop for hyper-personalized looks. The latest offering designs more shoppable looks, largely expanding the breadth of items on offer and removes the previous purchase requirement. It had also introduced the Shop Your Looks feature, which forms part of the direct-buy facility.
Defying coronavirus woes, Stitch Fix’s direct-buy revenues more than tripled quarter over quarter in the third quarter of fiscal 2020. Also, this capability largely contributed to net merchandise-revenue growth in the same quarter. The company’s active clients rose 9% year over year to 3.4 million in the fiscal third quarter, following which net revenue per active client increased 6% year over year to $498. This marked the eighth successive quarter of revenue growth per active client. Continuation of the trend is expected to boost the overall top line.
However, higher cost of investment toward digitization has been leading to increased costs. The company continued to witness elevated SG&A expenses in the fiscal third quarter, which took a toll on operating profits. Also, gross margin contracted mainly due to COVID-19. Nevertheless, management at its third-quarter conference call on Jun 8 informed that the company has been witnessing meaningful improvement in its top line. The resilience of its U.S. warehouse network and growth in client command are likely to aid the fiscal fourth quarter. Fourth-quarter gross margin is also expected to improve 200-300 basis points quarter over quarter, thanks to a balanced inventory portfolio. Furthermore, management anticipates generating positive free cash flow in the fiscal fourth quarter.
That said, Stitch Fix looks well-poised on its sturdy digital endeavors, with immense strength in the direct-buy capability. Encouragingly, this Zacks Rank #3 (Hold) company also boasts an impressive long-term earnings growth rate of 15%.
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