Stitch Fix: Once In The Doghouse, It Will Be Difficult To Climb Out (NASDAQ:SFIX)

With regards to battling a recession, already-weakened corporations are undoubtedly dealt a a lot more durable blow. Sew Repair (NASDAQ:SFIX) has been struggling to carry onto its area of interest enterprise mannequin for years: the clothes e-commerce firm as soon as was a novelty for sending clients a “Repair” of stylist-curated gadgets that they may select to both maintain or return, however in recent times the corporate has shifted towards a extra conventional direct-buy mannequin that robs Sew Repair of its distinction versus commonplace manufacturers.

Up ~15% 12 months to this point, Sew Repair faces an uphill battle in each retaining its buyer base whereas considerably lowering its bills and tightening its belt in an effort to survive the present downturn. In my opinion, SFIX inventory has rather more to lose.

Now that it is clear that Sew Repair is downsizing and going through severely weakened demand, I am downgrading my view on the corporate to very bearish. As a reminder to buyers who’re newer to this title, listed below are the highest causes to keep away from this inventory:

• Is Sew Repair related anymore, or is it only a passing fad? The thought of getting a “Repair” of 5 gadgets and retaining solely what you want was the entire promoting level behind Sew Repair within the first place. However declining lively clients appear to be suggesting that individuals don’t need this complexity within the purchasing course of. Actually, Sew Repair launched its direct-buy “Freestyle” program to reflect basic e-tailers: and in doing so, it misplaced its area of interest within the first place. With out a lot of a robust model to attract from, it is unclear how Sew Repair plans to stay related.
• No clear moat. Sew Repair’s revolutionary shopping for methodology was a part of its enchantment versus the handfuls of e-commerce clothes opponents on the market. With the enterprise doubling down on Freestyle, it is unclear what Sew Repair plans to do to carry onto buyer loyalty.
• Weighed down by inflationary pressures. Sew Repair’s gross margins are declining. On the identical time, though the corporate is letting go of a bit of its employees, additionally it is going through company wage inflation. The web result’s a deep gush of pink ink, which is precisely what Wall Road doesn’t need to see on this very cautious inventory market.

I would additionally say that Sew Repair is going through a disaster of management. Founder Katrina Lake is again as CEO, after stepping down in 2021 – however as the corporate continues to be trying to find a everlasting chief, it provides many the impression that Lake has little confidence that her brainchild nonetheless has endurance. It would not assist both that the corporate’s former CFO, Dan Jedda, jumped ship as properly.

Little doubt that Sew Repair is reasonable – at present share costs simply north of $3, the corporate has a market cap of $386.6 million. After netting off the $221.6 million of money on Sew Repair’s stability sheet, the corporate’s ensuing enterprise worth is simply $165.0 million.

This represents a 0.1x EV/FY23 income a number of towards Wall Road’s consensus FY23 income estimate of $1.65 billion, representing a -21% y/y decline (knowledge from Yahoo Finance). Sew Repair is actually low-cost – however it’s low-cost for a purpose.

With Sew Repair aggressively reducing spend, together with its advertising and marketing price range, it is unclear how the corporate will plan on staunching its bleeding of shoppers or its lack of margin. With no turnaround catalysts on the horizon, it is best to steer clear right here.

Clients are dwindling, and gross margin is declining

Sew Repair’s most up-to-date quarterly earnings present an organization that’s in dire straits. Check out the corporate’s buyer tendencies beneath:

The corporate misplaced 135k lively clients sequentially within the quarter to finish at 3.57 million, down -11% y/y. Engagement and spending per buyer can also be down -6% y/y to $516, reflecting clients tightening their belts within the present macro atmosphere.

The snapshot beneath exhibits the corporate’s full fiscal Q2 (January quarter) outcomes:

Income declined -20% y/y to $412.1 million, lacking Wall Road’s $413.0 million expectations. Sew Repair’s choice to cut back promoting spend is a part of the catalyst right here; the corporate slimmed down its promoting price range to only 5% of income, and advert prices are down -46% y/y.

Sadly, dis-economies of scale are kicking in. The corporate misplaced 400bps of gross margin 12 months over 12 months to only 41%, pushed each by a better promotional atmosphere (competitor Farfetch (FTCH) has additionally famous that many retailers, sitting on mounds of stock, are discounting extra aggressively to maintain product transferring) in addition to increased freight provider charges.

Equally, adjusted EBITDA declined sharply -63% y/y to $3.8 million, representing a meager 1% margin:

The intense aspect is that Sew Repair is not burdened with any debt, and its $222 million of money provides it endurance particularly as the corporate plans to make additional opex cuts. Per interim CEO Katrina Lake’s remarks on the Q2 earnings name:

We restructured our working mannequin and made the troublesome choices to cut back our headcount by 20% of wage place and to set our operations in our Salt Lake Metropolis warehouse. Late final 12 months, we started analyzing the group and decided to restructure the group in an effort to create a leaner working mannequin. This additionally permits us a possibility to reorganize and refocus to extra nimbly execute. These choices are by no means straightforward, however we all know it was the precise choice to realize our objectives of liquidity and profitability and for the general well being of the enterprise.”

Sadly, an organization cannot save itself by means of downsizing if buyer counts and income are shrinking on the identical tempo.

Key takeaways

With a fading model, a shrinking buyer base, and a revolving door of govt management, it is unclear how Sew Repair plans to get again on the precise foot. Particularly throughout troublesome macroeconomic occasions, it is higher to keep away from this firm and make investments elsewhere.