Why Stitch Fix Shares Plummeted Today

What happened

Shares of Stitch Fix (NASDAQ: SFIX) were getting shredded for the second straight quarter after the company again came up short on user growth. Despite better-than-expected results on both the top and bottom lines, the market focused on the user-growth numbers and sent the stock down 27.7% as of 12:40 p.m. EST on Tuesday.

So what

Oddly enough, Stitch Fix shares were initially up in after-hours trading on Monday as investors seemed to cheer the headline numbers. Revenue increased 24% to $366.2 million, which easily beat expectations at $358 million, and adjusted earnings per share jumped from $0.04 to $0.10, breezing past estimates at $0.03.

Though the stock bounced at first on those numbers, shares were trading lower by the time its earnings call started as investors homed in on the active-user numbers. Active clients increased 22.3% year over year to 2.93 million, which was just short of estimates at 2.95 million. Perhaps more concerning was that Stitch Fix projected sequential client growth to be "relatively flat" in the second quarter as it scales back on advertising spending during the holiday season, because it doesn't see the seasonal spike in sales that other apparel retailers do.

But the company still expects revenue growth for the current quarter to remain on pace with the first quarter, calling for revenue to increase 22% to 24%, or $360 million to $368 million. That means management expects growth in revenue per active client to compensate for slower active-client growth; it sees initiatives like Style Pass, Extras, and simply maturing client relationships as driving higher revenue per user.

Now what

Management offered a similar message on its earnings call as it did in its fourth-quarter report, saying that the company is on track in executing its long-term strategy and maintained its goal of delivering annual revenue growth of 20% to 25%.

However, investors are getting increasingly skeptical as this is the second quarter in a row that the stock has plunged on user-growth concerns. Stitch Fix shares are now down by nearly two-thirds from their peak in September, but are still up more than 20% from the IPO at $15 last November. That seems to signal that Stitch Fix's sudden rise over the summer was driven most by unrealistic euphoria.

This is a long-tail kind of stock, and its growth story will play out over several years. While investors are surely disappointed with today's plunge, there's little reason in this report for long-term investors to change their investing theses.

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Jeremy Bowman owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.