Stitch Fix shares sink 26% as focus shifts from new clients to selling more to existing ones

Stitch Fix shares sink 26% as focus shifts from new clients to selling more to existing ones

Stitch Fix’s shares plummet as investors question the company’s change in strategy

Stitch Fix Inc. reported fiscal first-quarter earnings that beat expectations, but a change in strategy that includes slowing growth in new users has sent shares plummeting as much as 26% in Tuesday trading, and closing down 21%.

Earnings of 10 cents per share and sales of $366.2 million beat the FactSet expectation for 3 cents per share and $358 million in sales.

The personal styling service also reported 22% year-over-year customer growth, reaching 2.9 million active clients.

For the second quarter, Stitch Fix SFIX, -1.36%   expects “slower” active client growth, advertising spending to be lower, and a flat active client count. An active client is defined as someone “who checked out a Fix in the preceding 12-month period,” the company said.

“Our focus is not to add clients for the sake of adding clients,” said Mike Smith, the company’s chief operating officer on the earnings call, according to a FactSet transcript. “We seek to attract clients whom we can serve well from the outset and whom we believe will be healthy long-term clients.”

With that in mind, the strategy going forward is to couple active client growth, with growth in net revenue per client, which is calculated “by dividing net revenue over the trailing 12 months by active clients in the end of the period.”

The company will also push efforts like adding brands to its lineup to entice customers.

“Looking forward, we expect each of these to play a role in driving our top line performance,” Smith said. “In any given quarter, one may outpace the other, depending on initiatives that we deploy in that period.”

“Due to a lack of visibility into this key metric, underpinning soft net addition guidance and greater risk in our view to out-year sales and earnings estimates, we are downgrading Stitch Fix shares to market perform,” analysts led by Ralph Schackart wrote.

Shares were previously outperform.

“This is a slight shift in messaging from prior quarters, where growth was expected to be driven by membership growth,” wrote SunTrust Robinson Humphrey analysts, who think this is driving a bearish reaction.

“A key tenet to this thesis is that Stitch Fix’s offering only appeals to a small segment of the market, and that management’s 20%-to-25% year-over-year revenue growth over the next few years (reiterated last night), may not be achievable,” SunTrust said.

If the company can achieve that 20%-to-25% growth target, analysts there believe Stitch Fix will “remain attractive.”

SunTrust rates Stitch Fix shares buy with a $40 price target.

Even for bullish analysts, the active client growth number is a sticking point. Stifel analysts think Stitch Fix continues to use data science to growth share of wallet, increase satisfaction and drive efficiencies.

“Despite these ongoing improvements and our expectations for further efficiency gains over the coming quarters, we remain hold rated given the limited visibility into Stitch Fix’s core, domestic active client growth over the intermediate term,” SunTrust wrote.

Stifel has a $28 price target on Stitch Fix shares, down from $30.

Stitch Fix stock has lost 20.5% in 2018 while the Amplify Online Retail ETFIBUY, -0.95%   has gained 5.3% and the S&P 500 index SPX, -0.04%   has slipped 1.4% for the period.

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