Down 13%, Is Stitch Fix a Buy?

Stitch Fix (NASDAQ: SFIX) reported some tough results in its latest fiscal quarter. While revenue was positive and losses better than the previous trend, it's still hard to say that Stitch Fix is a good buy.

Down more than 13% recently, investors seem to be noticing the trend of declines in clients, which will make it harder for the subscription clothing service to grow revenue over the long term.

Image source: Getty Images.

The revenue gains are undermined by the number of declining customers

For Stitch Fix to grow, it has to increase its customer base. The opposite happened in its most recent quarter, with active clients decreasing by 10.6% year over year, and 0.8% quarter to quarter. In all, Stitch Fix's fiscal third-quarter revenue increased 0.7% year over year to $325 million.

The problem is that revenue was gained by increasing net revenue per active client by 3.2% to $542 per person. Short term, this certainly works. Long term, it's not a promising proposition. You can only derive so much revenue from a declining client base over time.

Total revenue increased slightly for the quarter, but if you look at the first nine months of the fiscal year, revenue was down from roughly $1.06 billion, to $956 million year over year.

Looking ahead

For fiscal year 2025, of which there is only one quarter left, guidance is calling for net revenue of $1.245 billion to $1.26 billion, which would be a 6.2% to 5.9% decline from the year before. It follows a troubling trend for Stitch Fix. The subscription clothing service has seen its top line deteriorate annually for three years in a row, and fiscal 2025 doesn't look like it's going to be any different.

If the client base keeps shrinking, it's very hard to be bullish on this stock. The annual losses are also a headache for the company as it tries to grow.

To be fair, things were much better through the first nine months of fiscal 2025. Total net losses were $20.16 million through the first three fiscal quarters, whereas things were much higher at $92.34 million the year before. This was encouraging news, and definitely something to make shareholders happy. But I still don't see how a trend toward profitability can carry over the long term if the number of customers remains in decline.

I will extend an olive branch where it's due: Under CEO Matt Baer, the company finally reported revenue growth in the most recent quarter. The game plan seems to be to focus on increasing personalization, but to this point, that hasn't brought in new customers.

This is not an easy concept

This seems like a wait-and-see stock. Until it rights the ship in terms of clients, there's danger here. The stock is down 82% over the last five years for a reason, and compared to a gain of nearly 98% for the S&P 500 (SNPINDEX: ^GSPC), it doesn't seem like a great buy.

A contraction in clients cannot be ignored, and there's some logic behind it. The concept of having clothes chosen for you might not appeal to a broad audience. People like to pick their own things.

This is a tricky concept to execute. Not only do you have to pick things that people will actually like, you have to get the sizing right as well, lest you end up with tons of returns. That, to me, might be one of the reasons that the number of clients is in decline.

The one thing that might counter the negative sentiment, given the weakening client base, would be a shift to profitability. But estimates aren't calling for that in the near future.

Analyst estimates are predicting that earnings will remain negative all the way into fiscal 2027, with a loss of $0.10 per share that year. To me, it's difficult to remain overly motivated to buy Stitch Fix stock when you're looking at that long a time frame without profitability, combined with the fact that there's weakening customer interest.

I reiterate that it's going to be difficult to drive top-line growth over the long term if the total number of customers declines. For now, I think this is definitely a wait-and-see stock.

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David Butler has no position in any of the stocks mentioned. The Motley Fool recommends Stitch Fix. The Motley Fool has a disclosure policy.