Stitch Fix stock price has soared: is it a buy before earnings?

Stitch Fix stock price has jumped in the past few weeks as investors bought the dip despite its business facing major challenges. SFIX shares will be in the spotlight on Tuesday when the company publishes its financial results.

Stitch Fix business has faced major challenges

Stitch Fix is an e-commerce company that sought to disrupt the apparel industry using e-commerce and subscriptions. Subscribers receive unique outfits every month, select those that please them, and then return the rest. 

Stitch Fix became a highly popular company a few years ago because its business approach allowed for a win-win situation. Customers received unique products monthly and paid for what interested them, and the company made money. 

Recently, however, Stitch Fix business has slowed substantially because of the subscription fatigue among customers. As a result, its annual revenue dropped from over $2.1 billion in 2021 to $2 billion in 2022, and $1.59 billion and $1.3 billion in the following two years. 

The trend continued in the last quarter, when its sales fell. Its revenue dropped by 5.5% to $312 million, while active clients dropped by 2.6% to 2.37 million QoQ and by 15.5% from the same period last year. It had over 3.28 million in 2023.

The management expects that the business will continue to slow. Its guidance was that its sales in the recent quarter would be between $311 million and $316 million, a 3.6% decline. 

Its annual revenue guidance is that revenue will be between $1.225 billion and $1.24 billion, while its adjusted EBITDA will be between $40 million and $47 million. 

If these numbers are correct, they mean that the sales will drop by between 8.4% and 7.3% this year.

Why SFIX stock has jumped

Therefore, the Stitch Fix stock price has jumped as investors believe that the company, under Matt Baer, is starting to turn the corner. For one, he has implemented some changes as he refocuses on profitable growth. 

For example, he shut down UK operations and continued to improve its cost structure. For example, he removed over $100 million in SG&A last year as he targets profitability in the coming years.

Wall Street analysts expect that Stitch Fix’s annual revenue will be $1.23 billion this year, followed by $1.2 billion next year. They also see the earnings per share moving from $0.3 this year to $0.25 next year. 

The company is also monetizing the current customers well as the revenue per active client has jumped to $537, up from $515 last year.

However, the company faces major risks ahead despite making progress. The main risk is that its active customers may continue falling because of the regular deliveries. When you receive clothes per month for so long, chances are that you will have fatigue over time.

Stitch Fix stock price analysis

The weekly chart shows that the SFIX stock price has remained in a tight range in the past three years. This performance mirrors that of other pandemic winners like Zoom Video and PayPal. 

The stock has remained between $2.80 and $5.20 in this period, and is now approaching the upper side. 

It has formed an inverse head-and-shoulders-like pattern, a popular bullish reversal sign. It is now nearing the upper side at $5.20. 

There are signs that the stock has moved to the accumulation phase of the Wyckoff Theory. This means that it may stage a strong comeback as bulls target the psychological point at $10. The alternative scenario is where it resumes the downtrend and retests the lower side of the channel.