Stitch Fix disappointed with its recent earnings results, but KeyBanc Capital Markets argues that investors should focus on the longer term, as the online personal-styling service looks poised to take market share in the rapidly shifting world of fashion.
Analyst Edward Yruma reiterated an Overweight rating on Stitch Fix (ticker: SFIX) Wednesday and raised his price target to $36 from $32, writing that the company is “uniquely positioned to take share across a rapidly shrinking traditional apparel space.”
By his estimates, some $40 billion in apparel spending is up for grabs, given recent retail bankruptcies and store closures, and that number will only increase into 2021. That creates an opportunity for Stitch Fix, which has developed an algorithm to improve its styling and size recommendations.
Yruma is also optimistic about the company’s Direct Buy division, which, separate from its styling services for existing clients, allows new customers to immediately begin shopping for individual items. He writes that early data have been promising, while Direct Buy margins look poised to improve over time, and its “Trending for You” feature “enables more shoppable looks.”
Ultimately, he believes that Stitch Fix will be able to deliver high-single-digit Ebitda (earnings before interest, taxes, depreciation, and amortization) margins, roughly comparable to what department stores saw a decade ago, while the company benefits from having fewer promotions and lower capital needs. He concludes that the “stock is attractive against the backdrop of accelerating sales and a prospective margin expansion story.”
Stitch Fix is up 4.2%, at $28.19, in recent trading, and has risen 9.7% year to date. The company has benefited from the surge of online shopping that’s come with the Covid-19 pandemic, and Yruma isn’t the only one who thinks that it will be a long-term winner after the pandemic reshapes retail. That said, analysts disagree about whether or not the stock has run up too far.
Write to Teresa Rivas at [email protected]