Why Stitch Fix Inc Stock Was Falling Apart Yesterday

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What happened

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Shares of Stitch Fix Inc (NASDAQ: SFIX) slumped on Wednesday -- closing down nearly 10% -- after the subscription clothing specialist reported its first public earnings report on Tuesday night. The stock moved up about 4% on Thursday. Though the company beat estimates on the top and bottom lines and posted strong customer growth, the market seemed to punish it for weaker-than-expected guidance for earnings before interest, taxes, depreciation, and amortization (EBITDA).

So what

Stitch Fix said revenue in its first fiscal quarter of 2018 increased 25.2%, to $295.6 million. That growth was driven by a 29.7% increase in active clients, defined as customers who have used the service in the last year, to 2.4 million. The attention on the company in the run-up to the November IPO may have helped it attract more customers.

Gross margin and selling, general, and administrative (SG&A) margins both compressed as the company expands into men's and plus-sizse categories and makes new investments in tech talent and advertising. Adjusted net income fell from $14.7 million to $4.4 million, but adjusted earnings per share of $0.04 beat estimates by $0.01.

CEO Katrina Lake said: "We had a successful first quarter, and we appreciate the support of our clients, employees, partners, and shareholders. We are excited about the company we have built and the significant opportunities ahead to continue transforming the way people find what they love."

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Now what

Top-line guidance was strong for Stitch Fix as it called for revenue to grow 21%-24% for the current quarter and 20%-25% for the full year. Both midpoints were ahead of the analyst consensus. However, its adjusted EBITDA forecast, at $40 million-$60 million for the full year was a little weaker than expected, resulting in the sell-off.

Still, investors should be mindful that the stock is up nearly 50% since last month's IPO, meaning Wednesday's slide is more of a modest correction to that growth rather than an indicator of serious problems. At this stage in the company's life cycle, it's much more important to demonstrate revenue growth than profit growth. The stock may be down, but this was a solid first report.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.