Why Stitch Fix Could Still Dress to Impress Despite Weak Guidance

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It's simple. 

Real Money Stock of the Day Stitch Fix (SFIX) - Get Report has several avenues for new revenue channels that could make the company much larger than it is now. 

For now, investors are focused on the dimmer-than-expected outlook for the company's existing operations. Stitch Fix beat earnings estimates, but missed on the key EBITDA (earnings-before-interest-tax-depreciation-amoritization) metric and revenue and EBITDA guidance for 2020 was poor. The stock fell 14.56% to $17.14 a share Wednesday. 

Earnings & Guidance

Revenue came in at $432 million, in line with Wall Street estimates and rising 36% year-over-year. Earnings per share was 7 cents, beating estimates of 4 cents. That doesn't mean EBITDA was better than expected, as that result came in at $6.4 million, missing Wall Street estimates of $8.5 million. Higher than expected inventory reserves and research and development spend were two culprits causing the miss. 

Management guided for full year 2020 revenue of between $1.9 billion and $1.93 billion, representing over 20% growth. The company expects 2020 EBITDA between $10 million and $30 million. Analysts are looking for $21 million. The lower guidance comes as the company is expecting a lower average order value and to spend less on marketing, which would restrict its ability to reach the totality of its potential market for 2020. 

4 Growth-Driving Positives

While the current U.S. business, much focused on women, is seeing a slight step back in expectations, there are several initiatives the company is undertaking that could make a bog difference down the line. 

First off, the company's Direct-Buy initiative is a "game-changer," wrote RBC Capital Markets analyst Mark Mahaney in a Wednesday morning note. This initiative allows customers to locate products outside of the fix universe but directly from the website, as Stich Fix uses customer data and history to suggest the perfect clothing match. 

Secondly, Stich Fix is expanding its men's category, a theme seen in emerging retail businesses of late. Lulu Lemon (LULU) - Get Report  , more known for its women's selection, disclosed on its latest earnings report it's growing its men's category quite purposefully and rapidly. 

Stitch also wants to expand its children's offering, which is still in its early stages. 

Also in its early stages is Stitch's United Kingdom business, which accounts for almost no revenue for the company presently. 

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