Stitch Fix Sees Fashion Fans Flee

Here's our initial take on Stitch Fix's (NASDAQ: SFIX) fiscal third-quarter financial report.

Key Metrics

Still Going Out of Style?

Investors initially had trouble deciding what they thought of Stitch Fix's fiscal third-quarter financial report, and it's not surprising once you look at the numbers. On the positive side, after having predicted falling sales for the quarter, Stitch Fix managed to eke out a modest gain. The apparel delivery specialist kept losing money, but losses were significantly narrower than most of those following the stock had anticipated.

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In addition, Stitch Fix boosted its forecast for the full 2025 fiscal year. The company now anticipates revenue of $1.254 billion to $1.259 billion, which is up from a previous forecast of $1.225 billion to $1.24 billion three months ago.

However, there were still considerable problems that Stitch Fix had to deal with. Active client counts were down another 18,000 over the past three months to 2,353,000. That's 280,000 fewer active clients than Stitch Fix had this time last year. Revenue per active client managed to post a 3% rise, but a drop of 1.3 percentage points in gross margin to 44.2% suggested that Stitch Fix is having difficulty passing on the costs of goods sold to its customers. And even after making adjustments for a fiscal year with a different number of weeks, Stitch Fix still anticipates seeing full-year revenue drop 4.3% to 4.7% year over year.

Immediate Market Reaction

Stitch Fix's stock was extremely volatile in after-hours trading following the release of the report. Initially, the stock plunged as much as 11%, as investors seemed to react negatively to a relatively modest upward revision to full-year guidance. However, as time went on, shareholders seemed to become more comfortable with past results and future guidance. After 30 minutes of trading, Stitch Fix shares were actually up 1% from where they closed the regular session.

What to Watch

CEO Matt Baer tried to frame the quarter as being an important milestone in Stitch Fix's longer-term transformation. Yet investors need to understand that even though the Stitch Fix CEO celebrated a return to year-over-year revenue growth, it's highly likely that the fiscal fourth quarter will bring another decline -- albeit because of a quirk in the number of weeks in Stitch Fix's fiscal calendar.

More importantly, Stitch Fix can't afford to let margin performance slip just to get higher sales. To truly become "the retailer of choice for apparel and accessories," Stitch Fix needs to find a way to return to positive earnings. That's going to be difficult as long as active client counts keep sagging.

Helpful Resources

• Full earnings report
• Investor relations page

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Stitch Fix. The Motley Fool has a disclosure policy.