Is Stitch Fix Still in Trouble? Here's What the Balance Sheet Says. | The Motley Fool (2024)

Stitch Fix (SFIX 8.29%) offers an online personal styling service. That was popular during the work-from-home and social distancing days of the coronavirus pandemic. But when the world started to open back up again, sales plunged. The stock followed along for the ride, and is now down roughly 95% from its early 2021 high-water mark. How much risk is there in this stock?

Money makes the world go 'round

One of Stitch Fix's problems is that it is losing money. The company dipped into the red in fiscal 2020, which ended in August of that year. It has been unprofitable since that point, with fiscal 2023 shaping up to be yet another year in the negative column. Through the first nine months of the fiscal year the company's loss totaled $1.26 per share, greater than the loss of $1.02 in the same period of fiscal 2022. The trend does not seem to be friendly to investors here, since it is unlikely that the fiscal fourth quarter will reverse the losses accumulated in the first three quarters.

This is, indeed, bad news, and investors are correct to be worried about Stitch Fix's long-term future. But there's another financial statement to examine before investors throw in the towel: the balance sheet. At the end of the fiscal third quarter of 2023 the company had a cash balance of $193.5 million. In addition to that, it also had short-term investments of roughly $50 million. So in total, the company has cash or cash-like assets worth about $240 million, rounding down to be conservative.

In fact, the company's cash balance (excluding short-term investments) increased from $130.9 million at the start of fiscal 2023 to the current $193.5 million. That reflects the shift of investments into cash, so it isn't exactly a testament to the company's strong operating success. But it does speak to Stitch Fix's ability to keep funding its business even in the face of red ink. While it is true that the company can only access the cash from investments for so long before there's no more cash available from this source, the company also has no long-term debt. So it basically has a rock-solid balance sheet, and that gives it time to muddle through its problems.

Is there a fix for Stitch Fix?

While financially there doesn't appear to be a huge concern about Stitch Fix's red ink, which allows the company additional time to work on its business model, that doesn't mean investors should be positive here. The company offers an online personal styling service. That sounds kind of cool, but it also seems like it's going to have to offer the same service to a lot of customers if it wants this business model to work online. It really isn't a 1-to-1 relationship -- it's an attempt to create a one-to-many relationship that feels like it's 1-to-1. But it doesn't appear to be catching on with consumers.

When the pandemic left many physical stores closed, customer demand skyrocketed for Stitch Fix. Revenue originally dropped in early 2020 as fear drove the United States into a brief recession. But then, with many people stuck at home and unable to shop, sales rocketed higher, peaking in late 2021. It seems a lot of people might have found the Stitch Fix service interesting and decided to give it a try.

SFIX Revenue (Quarterly) data by YCharts

As the chart above shows, however, revenue turned lower after that late 2021 peak, and has continued to fall. Reading into that trend, it appears customers who tried the service weren't impressed enough to keep using it. The company's active client count fell 11% year over year in the fiscal third quarter of 2023, and revenue per active client dropped 9%. That's a double whammy of bad news.

To address the business model problem, the company announced that it undertook a review of its operations during the quarter. The goal was to help move toward sustainable profitability. Management decided to go from five distribution hubs to three, and to look at exiting its U.K. operations. These could be the right moves to make, but they clearly don't speak to a business model that is growing. It seems like Stitch Fix is, instead, shrinking to fit the real market opportunity it has in front of it.

Smaller but better?

Given Stitch Fix's strong balance sheet, it doesn't appear there's a near-term concern about its ability to stay afloat. That's a good thing. But that doesn't mean its business model is workable over the long term, with its effort to shrink strongly hinting that the opportunity management thought was there really isn't. At the end of the day, this niche retailer is a turnaround play that only aggressive investors should be looking at, even though it seems like there's plenty of time for management to rightsize the business model.