Forget dividends, this US tech stock is all about growth

Up almost 150% since April, our overseas investing expert has great technology and cash in the bank.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

An online retailer that has turned the use of technology into a fine art ought to have been a sure-fire winner during the coronavirus crisis, but Stitch Fix (NASDAQ:SFIX) has disappointed somewhat this summer. Better times could still be just round the corner.

The company uses algorithms and data science, supported by 150 data scientists and nearly 5,000 stylists, to target the sale of clothing to meet its clients’ specific needs in terms of taste and budget. It keeps a digital inventory of customers’ purchases and sends its own clothing and other brands to their homes.

Stitch Fix is growing quickly, with client numbers rising from 2.2 million three years ago to more than 3.5 million now. Each client spent on average $486 in the latest three months, up 2% year on year. Revenue is also rising, up 11% year on year, and sales are generating positive cash flow. The group has no debt – indeed, it has best part of $400 million of cash and investments.

This is a remarkable performance considering the company scrapped advertising from late March to the end of May with a knock-on effect on recruiting new customers.

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Sales are admittedly still quite small compared with other major clothing companies, so it is possible for Stitch Fix to be outmuscled by larger rivals. However, no other company seems to have got the technology so well refined and Stitch Fix could grow much larger before it faces a directly comparable rival.

Source:  interactive investor. Past performance is not a guide to future performance.

For the fourth quarter to 1 August, Stitch Fix reported a disappointing net loss of $44.5 million, helping to produce a net loss of $67.1 million for the full year. Covid-19 has taken a toll, with the worst impact in the third quarter, and any economic setback in the US would have a further impact on profitability.

However, online sales look set to grow as a whole new audience has learnt during lockdown the convenience of shopping online. Stitch Fix should easily be able to increase its market share in the coming months and years, given that it has increased sales during the past few months when many clothing retailers have reported falling sales. 

Such is the demand for Stitch Fix’s offering that during July delivery times had to be lengthened. That doesn’t seem to have had much, if any, adverse effect, as customers come straight back with repeat orders and return rates are half the level experienced by other online clothing retailers.

Management reckons $20 billion of retail sales will switch to e-commerce over the next 18 months and, while that figure can be no more than an educated guess, the actual figure is going to be many times more than the company’s current turnover. 

Certainly, Stitch Fix is making the most of its chances. In June, it rolled out Trending For You, a new feature that widened the selection of items that customers can choose from. Another initiative is to link up with little known but promising designers from minority ethnic groups to widen the ranges on offer.  

Stitch Fix was founded in 2011 and its shares started trading on Nasdaq at $15.15. I first recommended them at $27 in February 2019 with a warning that they were not for the fainthearted. 

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It has been an up and down ride since, but the shares are now above my tip price and look to be back on the rise.

Hobson’s Choice: Buy at up to $30. This has been a ceiling in the past, one that may prove hard to break, but the shares have been as high as $50. If that happens again, consider taking profits. There is no dividend and no prospect of one in the foreseeable future as all cash will be ploughed into growing the business, so any investment is purely for share price gains.   

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.