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Shares of Stitch Fix (NASDAQ: SFIX) rose 12.1% on Tuesday, following the online personalized-apparel retailer‘s release on the prior afternoon of its report for the fourth quarter of fiscal 2023 (ended July 29).

That price action was a reversal from Monday’s after-hours trading session, in which the stock declined 6.6%. This reversal dynamic probably largely stems from the action of short-term traders, rather than long-term investors. The stock has a low price-per-share and a high short interest (short-sellers are those who bet that a stock’s price will decline), which increases its volatility.

The quick summary of the report: It was poor, with two relatively bright spots being that the company generated positive free cash flow, albeit largely stemming from cost-cutting measures, and that it’s planning to exit the U.K. market, in which it has struggled to gain traction.

Here’s an overview of Stitch Fix’s fiscal Q4 and its outlook, centered around six key metrics.

1. Revenue declined by 22%

In fiscal Q4, net sales fell 22% year over year to $375.8 million, which slightly topped the 23% decline Wall Street had expected. The result also slightly surpassed the high end of the company’s own guidance range of $365 million to $375 million.

2. Active clients fell 13% year over year

Fiscal Q4 2023
Change YOY

Number of active clients*

Average net annual revenue per active client

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 fell 11% and average net annual revenue per active client declined 9% year over year.

3. Operating loss was $31.2 million

Stitch Fix’s quarterly operating loss was $31.2 million, which was 68% narrower than the operating loss in the prior-year period.

This improvement was largely due to a more than $97 million decline in selling, general, and administrative (SG&A) expenses. Significant cost-cutting measures are a short-term remedy, not a sustainable way for a company to increase its operating results and bottom line.

4. Loss per share narrowed by 73%

Quarterly net loss was $28.7 million, or $0.24 per share, compared to a net loss of $96.3 million, or $0.89 per share, in the year-ago period.

Wall Street was looking for a loss of $0.21 per share, so the company fell short of this expectation. The improvement in the bottom line was driven by cost-savings initiatives.

5. Free cash flow was $17.7 million

The company generated positive free cash flow (FCF) for the third consecutive quarter. FCF for fiscal Q4 was $17.7 million, bringing the annual total to $38.8 million. The year’s FCF was driven by the company’s cost-cutting initiatives.

Stitch Fix ended the year with $257.6 million in cash, cash equivalents, and short-term investments, and no long-term debt.

6. Fiscal 2024 revenue is expected to decline by 20% to 16%

For fiscal Q1 2024 (which ends Oct. 28), management guided for revenue in the range of $355 million to $365 million for its U.S. business and $7 million for its U.K. business, which it’s planning to close in the first quarter of fiscal 2024.

The total range of $362 million to $372 million would amount to a drop of 22% to 21% year over year, and it falls considerably short of the $402.4 million for which Wall Street had been modeling. For the U.S. business alone, the outlook equates to a decline of 20% to 18%, the company said.

For the full fiscal year, management guided for revenue in the range of $1.30 billion to $1.37 billion for its U.S. business and $8 million for its U.K. business.

That total range of $1.308 billion to $1.378 billion would amount to a drop of 20% to 16% year over year, and fell significantly short of the $1.58 billion analysts had been looking for. For the U.S. business alone, the outlook equates to a decline of 18% to 14%, according to the company.

Continue to pass on Stitch Fix stock, as it’s likely a “value trap”

Stitch Fix stock might look tempting to value stock investors, given its low price-to-sales ratio. However, it’s likely a value trap, in my opinion.

The company’s business model is the core issue. As I wrote last quarter, “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.”

There are much better stocks in this market

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 results, I suggested investors explore athletic apparel specialist Lululemon (NASDAQ: LULU) and tech giant Nvidia (NASDAQ: NVDA). As I wrote, “both stocks are pricey using most conventional valuation metrics, but these two companies have fantastic long-term growth potential.”

I’m reiterating that the stocks of these two fast-growing companies are worth considering investing in.

Here’s my take on Lululemon’s fiscal Q2 2023 results, released in late August: Lululemon Stock Pops on Earnings Beat and Guidance Increase

And here’s my take on Nvidia’s fiscal Q2 2024 results, also released late last month: Nvidia Stock Soars as AI-Powered Earnings and Guidance Crush Estimates (Again!)

10 stocks we like better than Stitch Fix
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Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Lululemon Athletica, Nvidia, and Stitch Fix. The Motley Fool has a disclosure policy.

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