3 things investors should know before Stitch Fix reports third-quarter results on Monday

Published Mon, Jun 7 202112:02 PM EDTUpdated Mon, Jun 7 20213:31 PM EDT

Key Points

A bout of volatility may be ahead for Stitch Fix shares when the online styling service reports fiscal third-quarter results on Monday afternoon.
The company's stock has become notorious for taking wild rides in extended trading following its financial reports.
Stitch Fix is forecast to book a third-quarter adjusted loss of 27 cents a share and $510.6 million in revenue, a 37% increase from a year earlier.

Investors are preparing for what could be another roller coaster in Stitch Fix shares when the online styling service reports fiscal third-quarter results after the bell on Monday. The company's stock has become notorious for taking wild rides after its financial reports. Last quarter, shares plunged more than 20% after Stitch Fix posted a wider-than-expected loss and softened its annual outlook. Two quarters prior, shares rallied over 30% after the retailer beat profit expectations. The question is, "Which way the stock will run?" The business is expected to lose money, after swinging to a 20 cent loss in the period ended Jan. 30. Stitch Fix is forecast to book a third-quarter adjusted loss of 27 cents a share and $510.6 million in revenue, a 37% increase from a year earlier, according to an analyst survey by Refinitiv. There could be good news — if supply-chain headwinds ease and pent-up consumer demand boosts sales. Other apparel retailers have gotten lifts as the economy reopens and shoppers are looking to freshen their wardrobes. Wall Street likely wants to get a better taste of the change that a looming management shake-up could bring to the business. The retailer announced in April that its founder and current chief executive, Katrina Lake, will be replaced by President Elizabeth Spaulding on Aug. 1. Here are three key observations investors should look for as Stitch Fix rolls out its earnings. 1. A growing client base as demand for fashion rises Shares of Stitch Fix, which has a market capitalization of about $6 billion, have risen about 40% over the past month in anticipation that some of Stitch Fix's pandemic-related headwinds have started to subside and that customers are returning to its platform for work wear and special occasions. The stock could be coming to a peak, though. The average price target is $54, according to a FactSet survey of 17 Wall Street analysts, with a majority having a hold rating. That's slightly below where shares closed on Friday: $55.52. The stock hit a 52-week high of $113.76 on Jan. 27. Telsey Advisory Group analyst Dana Telsey is an outlier, with an $84 price target on the stock — the highest of FactSet's surveyed group of analysts. Telsey expects shipping headwinds — which many retailers have faced in recent months — to moderate. She also said Stitch Fix is well-positioned to take market share in the apparel category because more people buy clothes online. Evercore ISI's Mark Mahaney told clients there could be greater upside for Stitch Fix this quarter, given consumers' rebounding demand for fashion. This is something that companies including Macy's , Target , Gap and Rent the Runway have noted in recent weeks. Evercore ISI has a $78 price target on Stitch Fix shares. In the third quarter, Mahaney expects Stitch Fix to report active clients totaling 3.9 million, which would imply 23,000 net adds compared with a loss of 47,000 clients in the year-ago period. Stitch Fix defines "active clients" as people who have bought an item directly from its website in the preceding 52 weeks from the last day of the quarter. In its fiscal second quarter, Stitch Fix added 110,000 new active clients. Mahaney is also looking for annual revenue per active client to come in at $500, which would represent 1% growth year over year and a 7% increase quarter over quarter. To keep that revenue growing, Stitch Fix invested in additional categories that customers can add to their boxes every month, like intimates. 2. Supply chain headaches muddy outlook Many analysts are more conservative after Stitch Fix slashed its own outlook — citing uncertainty stemming from the health crisis that has made it more difficult to gauge consumer demand. In fiscal 2021, the San Francisco-based business is looking for year-over-year revenue growth in a range of 18% to 20%, down from its prior outlook of 20% to 25%. Analysts are now calling for a 19.1% increase, according to Refinitiv data. In addition to winning back customers who paused their subscriptions during the pandemic, Stitch Fix also needs to prove its supply-chain headaches are easing. The company has been working through longer gaps between the time it orders inventory and when the merchandise arrives at warehouses. The result has been backlogs. All the while, lower customer spending on apparel and accessories in the winter months ate into sales. We are curious to learn more about how Stitch Fix is catering to the needs to consumers who are looking for something for the 'here and now.' retail analyst, Piper Sandler Erinn Murphy It's unclear how long these headwinds will persist, and what further damage they could do to the business. Management has tried to quell worries by saying that Stitch Fix is working quickly to diversify its carrier network to mitigate the issue. Still, JPMorgan internet analyst Cory Carpenter said he is "cautiously biased" ahead of Stich Fix's third-quarter report, due to the low visibility that his firm has into how Stitch Fix is dealing with the delivery issues. JPMorgan has a $39 price target on shares. Stitch Fix is also exposed to more elevated shipping rates than many digital-only retailers because its customers are often returning parts of their orders, Carpenter said. Rarely are they keeping everything, he said. 3. Details on direct-buy offering One of Stitch Fix's biggest investments to drive growth in the coming quarters is its direct-buy initiative. In addition to its subscription service, active clients can now purchase individual items — including suggested merchandise based on prior purchases or recommendations — to complete outfits. Incoming CEO Spaulding noted in March that about 25% of the company's active women clients have made a direct-buy purchase. The company is expected to open up its direct-buy option to new users later this year. "The long-term vision is the most personalized shopping experience in the world," Spaulding told analysts on a recent earnings conference call. "And e-commerce has really been characterized for apparel by search." But there's still broader skepticism that this will pan out the way Stitch Fix has planned. Some analysts have argued that it will alter the business too much from how it started, as a subscription-only service driven by data and analytics. Piper Sandler senior research analyst Erinn Murphy is looking for more details about how Stitch Fix will scale the direct-buy program. "We are curious to learn more about how Stitch Fix is catering to the needs to consumers who are looking for something for the 'here and now,'" she wrote in a note to clients. Piper Sandler has a $47 price target on shares. —CNBC's Michael Bloom contributed to this reporting.