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The Ratings Game: Stitch Fix client numbers slump sending the stock plunging

Stitch Fix Inc. shares plunged nearly 13% in Wednesday trading, on track for a record low close, after the company reported a quarter-over-quarter decline in active clients.

The company

attributed the 4% decrease in clients to a mix-up in traffic signals as it tries to bring onboard a new set of clients for the Freestyle service, which offers clients the chance to purchase personalized outfits.

“In our efforts to launch and promote Freestyle, we chose to direct visitors coming to towards the Freestyle experience,” said Chief Executive Elizabeth Spaulding on the earnings call, according to a FactSet transcript.

“It is important to note that is the primary landing page for customers interested in ordering a Fix. Therefore, in leading clients to the Freestyle experience first, we inadvertently created friction for those seeking a Fix.”

Stitch Fix offers clients the option to regularly receive merchandise through an automatic delivery system that’s based on a style quiz. These “Fix” packages can be sent every few weeks or every few months.

The company is making changes to how it directs client traffic around its site.

See: Gap khaki pants sales were up 33% in January versus 2019 as shoppers get dressed to go out again

The problems drove a downgrade of Stitch Fix shares to hold from buy at Truist Securities. Analysts there slashed their price target to $12 from $40.

“While our long-term thesis around the attractiveness of the Stitch Fix
membership model and expansion into direct buy continues to hold, we find the execution so far to be challenged,” Truist wrote in its note.

Stitch Fix reported a wider fiscal second-quarter loss, though the result was ahead of expectations. Revenue missed Street expectations. The company also lowered its full-year outlook. The company had just over 4 million active clients in the quarter.

“We think the company’s decision to increase emphasis on the Freestyle offering makes sense, as we find it to be a more compelling consumer proposition than the legacy Fix business (the TAM [total addressable market] of people who want to pick their own clothes is a lot larger than the TAM of people who want to receive clothes sight-unseen),” wrote Wedbush analysts in a note.

“However, the transition is proving to be far more challenging than expected.”

Wedbush maintained its neutral stock rating, but lowered its price target to $9 from $21.

Wells Fargo analysts note this is the second straight “disappointing” quarter for Stitch Fix. Analysts are concerned that the company didn’t benefit greatly from the COVID-19 shift to e-commerce, and won’t gain from the recovery either.

Also:Here’s how retailers are tackling the delivery challenges that come with skyrocketing e-commerce sales post-COVID

“Essentially, if apparel demand starts shifting back to physical stores, then Stitch Fix wouldn’t necessarily see a significant improvement in trends,” Wells Fargo wrote.

“In other words, the key question here is ‘If the business was weak when consumers were unable/unwilling to go to physical stores, why would it be better when consumers are willing to go back to stores?’ As a result, we think there is meaningful uncertainty about Stitch Fix ’s recovery prospects post-COVID.”

Wells Fargo rates Stitch Fix shares underweight with an $8 price target, down from $14.

Stitch Fix’s price target was also cut at Stifel (down to $12 from $23, stock rated hold) and BMO Capital Markets (down to $11 from $25, stock rated market perform).

Stitch Fix shares have plummeted more than 80% over the past year while the S&P 500 index

has gained 9.9%.

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