Retail

Stitch Fix stock touches all-time low as styling service's future growth is in doubt

Key Points
  • Stitch Fix on Tuesday revealed a bleak outlook for its fiscal third quarter and slashed its forecast for the full year.
  • Chief Executive Elizabeth Spaulding tried to convince analysts during a conference call that the company's longer-term strategy remains in tact.
  • Investors, however, aren't so sure, as they send the stock to an all-time low.

In this article

The Stitch Fix logo on a smartphone arranged in Hastings-on-Hudson, New York, U.S., on Saturday, June 5, 2021. Stitch Fix Inc. is scheduled to release earning on June 7.
Tiffany Hagler-Geard | Bloomberg | Getty Images

Americans are getting dressed up again. But that doesn't mean all apparel retailers are going to be beneficiaries of post-pandemic wardrobe refreshes.

Stitch Fix is the latest example of this. On Wednesday, it shares touched an all-time intraday low of $8.75. The stock closed the day down 6% at $10.34.

After the company on Tuesday evening revealed a bleak outlook for its fiscal third quarter and slashed its forecast for the full year, Stitch Fix Chief Executive Elizabeth Spaulding tried to convince analysts during a conference call that the company's longer-term strategy remains in tact.

In the latest three-month period, Spaulding said that Stitch Fix struggled to onboard new customers, who pay for personalized boxes of clothing and other accessories delivered to their homes, called Fixes. But perhaps more worrisome for analysts and investors was the fact that the company's recent rollout of a direct-buy option, called Freestyle, hasn't converted as many people into Stitch Fix customers as the company had anticipated.

"We're still learning how best to onboard Freestyle first clients and recognize we have work to do on the Freestyle experience," Spaulding said on the call.

It hasn't even been a year since Spaulding took over the reigns as CEO from Stitch Fix founder Katrina Lake last August. But she's since been spearheading the company's new initiatives, including the Freestyle rollout, to win new customers.

Analysts are beginning to question Spaulding and her team's execution of those initiatives.

BMO Capital Markets analyst Simeon Siegel noted that Stitch Fix's investments in Freestyle are significantly different than the company's initial mission and format of selling curated boxes of clothing on a subscription basis, which when it launched was "new and different."

"At the end of the day, the push into Freestyle is an attempt to do everyday retail better," said Siegel. "Whether or not that succeeds will hinge on the company's execution. ... At the heart of it, Freestyle's success will depend on it being a better version of how people already shop."

Truist Securities on Tuesday evening downgraded Stitch Fix's stock to hold from buy. Analyst Youssef Squali wrote in a note to clients that management's execution, so far, appears to be challenged. Stitch Fix is now offering little visibility into how quickly the negative trends will reverse, he said. Truist cut its price target to $12 from $40.

Telsey Advisory Group slashed its price target, too, to $14 from $25. The firm downgraded its rating to market perform from outperform.

"While we expected [Freestyle] to expand the company's addressable market and drive incremental revenue, it has proven difficult to roll out without adding friction to the onboarding of new Fix customers," said Dana Telsey, chief executive and chief research officer.

For its fiscal year, which ends July 30, Stitch Fix said Tuesday that it sees revenue flat to slightly down year over year, assuming that the number of active clients is flat through the end of the 12-month period. Analysts had expected revenue to be up 8.1% for the year, according to Refinitiv estimates.

Stitch Fix has a market cap of about $1.1 billion, after Wednesday's losses.

—CNBC's Michael Bloom contributed to this reporting.

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