Is Stitch Fix (NASDAQ: SFIX) Making Money?

Theoretically, Stitch Fix (NASDAQ: SFIX) could be the perfect company for the current moment.

Stitch Fix’s digital platform connects users with stylists who help them shop for clothes. Customers then buy the clothes which Stitch Fix ships to them.

However, Stitch Fix is laying off 18% of its staff, including 1,400 stylists, BizJournals reports. In addition, Stitch Fix has closed two of its distribution centers.  

I guess the demand for Stitch Fix’s styling is down because people are working from home. To explain, you do not need a stylist’s help to buy sweats, t-shirts, and yoga pants.

Is Stitch Fix Growing?

Conversely, Stitch Fix could add 2,000 jobs in places such as Cleveland and Dallas, BizJournals notes. Hence, I suspect Stitch Fix’s business could be growing.

To elaborate, The San Francisco Chronicle claims the laid off staff are remote-working stylists in California. The layoffs came five months after Assembly Bill 5 became law in California.

Assembly Bill 5 reclassifies many independent contractors, gig-economy workers, as full-time employments. Hence, California’s minimum wage, vacation, overtime, meal-breaks, vacation rules, and unemployment insurance now apply to full-time gig workers.

Thus, I think Stitch Fix is moving its workforce to states with fewer regulations to save money. However, such a switch will increase political pressure for other states to follow California’s lead.

Stitch was growing before coronavirus. Stockrow estimates Stitch had a 22.01% revenue growth rate in the quarter ending on 31 January 2020. That revenue growth rate was up from 21.46% in the quarter ending on 31 October 2019, but down from 35.77% on 31 July 2019.

Does Stitch Fix Make Money?

Stitch Fix (NASDAQ: SFIX) made more money in the last quarter. For instance, Stitch Fix a quarterly operating income of $8.5 million 31 January 2020.

That operating income was up from $160,000 on 31 October 2019, but down from $15.41 million on 31 January 2019. Conversely, Stitch Fix’s quarterly gross profit rose from $163.15 million on 31 January 2019, to $201.30 million on 31 October 2019, to $202.19 million on 31 January 2020.

In contrast, Stitch Fix’s quarterly common net income went from $11.97 million to 31 January 2019; to -$180,000 on 31 October 2019, to $11.43 million on 31 January 2020.

Interestingly, Stitch Fix can generate cash. Stitch Fix reported an ending cash flow of -$5.84 million on 31 January 2019. The ending cash flow rose to $14.25 million on 31 July 2019 and $151.78 million on 31 October 2019. Conversely, Stitch Fix’s ending cash flow fell to $14.21 million on 31 January 2020.

Finally, Stitch Fix has more cash. Stitch Fix’s cash and short-term investments rose from $277.11 million on 31 January 2019 to $297.28 million on 31 October 2019, to $300.58 million on 31 January 2020. Thus, Stitch Fix had more cash at the end of 2019 than at the end of 2018.

What Value Does Stitch Fix Have?

I think Stitch Fix (NASDAQ: SFIX) has value because of its technological capabilities.

For example, Stitch Fix claimed to employ over 100 data scientists and over 3,900 stylists in February 2019.* In addition, Stitch Fix operated fulfillment centers in South San Francisco, Dallas, Phoenix, and Bethlehem, Pennsylvania.

Stitch claimed to have 3.2 million active customers in September 2019, CNBC reports. Each customer is a potential revenue source because Stitch Fix charges each user a $20 styling fee.

Hence, Stitch could make money from all the women afraid to shop at department stores and boutiques but still want to look stylish. To explain, Stitch’s stylists can help those people buy the fashions they want without COVID-19 exposure.

Is Stitch’s Market Growing?

Moreover, Stitch Fix’s market could grow because department stores and fashion retailers are dying fast. For example, J. Crew, True Religion, Neiman Marcus Group, and J. C. Penney (NYSE: JCP) have declared bankruptcy. Dramatically, one iconic department store brand Barneys New York has died completely.

Meanwhile, Nordstrom (NYSE: JWC) plans to close 19 stores. Nordstrom will close 14% of its footprint, Global Data analyst Neil Saunders tells USA Today.

Thus people will have fewer brick and mortar options for fashion shopping. Consequently, more people will seek alternative places to shop for fashion such as Stitch Fix.

Can Stitch Fix Compete with Amazon?

However, Amazon (NASDAQ: AMZN) is making a powerful push into fashion.

For instance, Amazon plans to launch a new luxury fashion platform in fall 2020, Quartz speculates. Amazon plans a platform that will give brands online stores, and access to Amazon’s logistic network and customer service resources.

The network could contain 12 fashion brands, Quartz speculates. However, Quartz cannot identify those brands.

Conversely, Stitch Fix’s website lists around 20 brands. Those brands include some big names such as bonobos, Calvin Klein, and Ralph Lauren.

Thus, Stitch Fix has some infrastructure Amazon wants to build in place. However, Amazon has the resources to build such an infrastructure fast. In particular, Amazon had $49.292 billion in cash and short-term investments on 31 March 2020. In contrast, Stitch Fix had $300.58 million in cash and short-term investments on 31 January 2020.

Under these circumstances, I do not think Stitch Fix can survive without a deep-pocketed benefactor. Therefore, I suspect a large retailer such as Macy’s (NYSE: M), TJX (NYSE: TJX), or Nordstrom could buy Stitch Fix to expand its sales. In particular, Macy’s or Nordstrom could sell fashions from their fulfillment centers through Stitch Fix and leverage existing resources.

Is Stitch Fix a Good Stock?

I think Mr. Market overpriced Stitch Fix (NASDAQ: SFIX) at $22.80 on 11 June 2020. To explain, I do not think Stitch Fix makes enough money to justify that price.

However, Stitch Fix has kept its share value in 2020. Stitch Fix began 2020 at $25.06 on 2 January 2020 and rose to $25.53 on 8 June 2020, then dropped to $22.80 on 11 June 2020.  Additionally, Stitch Fix’s share price peaked $29.37 on 21 February 2020.

In conclusion, I think Stitch Fix’s value is theoretical. Therefore, I advise all investors to stay away from Stitch Fix. You need to avoid Stitch Fix because there is no evidence this company can generate significant amounts of cash.

 *https://newsroom.stitchfix.com/wp-content/uploads/2019/02/StitchFix_FactSheet-19-02-19.pdf

Originally published at https://marketmadhouse.com on June 11, 2020.