Stitch Fix currently trades at $4.18 per share and has shown little upside over the past six months, posting a small loss of 2.5%. The stock also fell short of the S&P 500’s 11.7% gain during that period.
Is now the time to buy Stitch Fix, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Stitch Fix Will Underperform?
We’re cautious about Stitch Fix. Here are three reasons we avoid SFIX, plus one stock we’d rather own.
1. Decline in Active Clients Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Stitch Fix, our preferred volume metric is active clients). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Stitch Fix’s active clients came in at 2.31 million in the latest quarter, and over the last two years, averaged 9% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Stitch Fix might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Stitch Fix has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.1%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Stitch Fix’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Stitch Fix doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 8.5× forward EV-to-EBITDA (or $4.18 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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