Stitch Fix Stock Sinks on Earnings Miss and Lowered Guidance as Customer Shedding Continues

Shares of Stitch Fix (SFIX 4.01%) dropped 21% on Tuesday, following the online personalized-apparel retailer's release on the prior afternoon of its report for the second quarter of fiscal 2024 (ended Jan. 27).

The stock's decline is attributable to the quarter's earnings missing the Wall Street consensus estimate, revenue guidance for the third quarter coming in lighter than analysts had expected, and management lowering its full-year top-line outlook. The magnitude of the decrease in "active clients" might have also been a tailwind.

Below is an overview of Stitch Fix's fiscal Q2 results and its guidance, centered around five key metrics. The company discontinued its U.K. business in the prior quarter, and this operation is now reported as a discontinued operation in its financial reports. The key metrics below are for continuing operations.

1. Revenue from continuing operations declined 18%

In fiscal Q2, net sales from continuing operations fell 18% year over year to $330.4 million, which was nearly in line with the $330.9 million Wall Street had expected. The result was in the middle of the company's own guidance range of $325 million to $335 million.

2. Active clients from continuing operations decreased 17%

Data source: Stitch Fix. *The company considers an active client to be any customer who has bought at least one item in the past 52 weeks. YOY = year over year.

For context, last quarter, the number of active clients from continuing operations fell 15% year over year, and average revenue per active client from continuing operations declined 6% year over year.

3. Loss per share from continuing operations dropped 48%

The quarter's net loss from continuing operations was $35 million, or $0.29 per share, down 48% from the year-ago period. Wall Street was looking for a loss of $0.20 per share, so the company fell short of this expectation.

4. Free cash flow from continuing operations was negative $26.1 million

In fiscal Q2, free cash flow from continuing operations was negative $26.1 million. The company attributed the negative free cash flow to the "timing of receipts related to our inventory purchases in the first fiscal quarter."

Stitch Fix ended the quarter with $229.8 million in cash, cash equivalents, and short-term investments attributable to continuing operations, and no bank debt.

5. Full-year fiscal 2024 revenue from continuing operations is now expected to decline by 19% to 17%

For fiscal Q3 (ends April 27), management guided for revenue from continuing operations of $300 million to $310 million, which translates to a decline of 22% to 19% year over year. This outlook fell short of the analyst consensus estimate of $323.3 million.

For fiscal year 2024 (ends Aug. 3), management lowered its guidance for revenue from continuing operations to a range of $1.29 billion to $1.32 billion, down from $1.3 billion to $1.37 billion. The updated outlook translates to an annual revenue decline of 19% to 17%.

Continue to pass on Stitch Fix stock

Stitch Fix has a relatively new CEO who has solid related retailing experience. But I think it's highly unlikely any leader will be able to drive sustainable and profitable revenue growth because Stitch Fix's business model is flawed and seems unmendable.

As I've previously written, "I believe the main issue is that only a quite limited percentage of the apparel-buying population is interested in having a box containing apparel and accessories -- a 'Fix' -- that they did not choose themselves sent to them on a regular basis, or even just occasionally."

Beyond this core issue, the continued steady decline in the number of active clients reflects that a substantial number of customers who try the service are not satisfied with it.

There are much better stocks

Reiterating what I wrote after Stitch Fix's Q4 fiscal 2023 report:

Investors come to The Motley Fool looking for advice in helping them invest for the long term. So I don't like to be bearish on a stock I'm writing an earnings article about without offering investors some stocks that I'm bullish on.

After Stitch Fix reported its prior quarterly [Q3 fiscal 2023] results, I suggested investors explore athletic apparel specialist Lululemon and tech giant Nvidia.

These two stocks are up 123% and 25.7%, respectively, since June 8, 2023, when I initially mentioned them as just two examples of much better buys than Stitch Fix stock. Shares of Stitch Fix have been cut nearly in half since that date.

I think Nvidia and Lululemon still look attractive as long-term investments.