Why Stitch Fix's 42% Rally Didn't Last

Stitch Fix (NASDAQ: SFIX) was in the news last week after seeing its stock soar well over 40%. Now, at the time of this writing, it has a five-day loss of over 12.75%. If you happen to be one who made a quick trade, kudos to you.

But what happened here? The answer lies in expectations. Operating losses and net losses improved, giving buyers something to be excited about. The overall narrative, however, remains challenging, which is why the Stitch Fix rally was short-lived.

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Despite beating some expectations, the financials were weak

In the fiscal first quarter of 2025, the customized online clothing retailer reported a 12.6% decrease in year-over-year revenue, to $318.8 million. On the brighter side, losses did ease, with a net loss of $6.25 million, compared to $35.49 million a year earlier. This amounted to a loss of $0.05 per diluted share compared to a loss of $0.30 last year.

Reduced losses are certainly a welcome sight, but the general theme of the quarter, along with the guidance, leave me feeling a little less inspired.

According to the company's most recent investor presentation, revenue has declined since the second quarter of 2023 and has been relatively flat over the last few quarters. This raises a question: Is there a scalable business here? At the end of the day, you can only create profits over the long term if the business itself is growing.

Guidance doesn't imply great things on the revenue front. The company's 2025 first-quarter press release called for a second-quarter year-over-year revenue decline of 9% to 12%. For the full year, estimates are for adjusted net revenue to decline 10% to 13%, to a range of $1.14 billion to $1.18 billion.

The number of active clients is shrinking

To expand over the long term, you have to grow your client base. Stitch Fix is heading in the opposite direction. Active clients have declined from nearly 2.9 million in October of 2023 to almost 2.44 million in the quarter ended Nov. 2, 2024. In fact, the client base has declined for seven quarters in a row.

In the most recent quarter, overall active clients decline 18.6% year over year to 2.43 million. On a quarter-to-quarter basis, active clients declined 3%. To me, this seems to be the company's No. 1 problem: It has to find a way to get more clients.

The issue has been partly addressed by a recent improvement in revenue per client. In the 2025 first quarter, net revenue per active client increased 4.9% year over year to $531.

An inherent risk

This is a stock struggling to keep up with the S&P 500, and it's not surprising given the weak revenue. The big thing here is that there is still risk. Yes, losses eased year over year. Yes, revenue per client improved.

But those pesky revenue declines make Stitch Fix a tough sell right now. It makes it very difficult to continue improving the bottom line over the long term if you can't grow the top line in the near term.

The stock got a run on the hopes of improvements leading to profitability. I think the craze ended so abruptly because the big-picture issues quickly sunk in for investors. It's tough to say what the fix is here. Is the company's pricing off? Are the styles it curates for customers not hitting the mark?

Gross margins are trending in the right direction, with 45.4% in the first fiscal quarter, but I still think this stock will struggle to provide any sustainable upside unless the company can fix its revenue issues.

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David Butler has no position in any of the stocks mentioned. The Motley Fool recommends Stitch Fix. The Motley Fool has a disclosure policy.