Stitch Fix's stock is on pace for its worst drop ever. Here's what has analysts worried.

By Bill Peters

'Management is planning for the company to return to positive revenue growth by the end of fiscal 2026, well beyond the Street's expectation prior to the print,' analyst says

Shares of Stitch Fix Inc. plunged toward their biggest percentage drop on record Wednesday, after the online styling service's quarterly results a day earlier amplified investors' worries about the pace of its turnaround effort amid a prolonged stretch of weaker demand for clothing.

While Wall Street analysts said that some of those efforts were showing signs of working, the number of Stitch Fix's (SFIX) active clients - customers who had clothing shipped to them within the past year - continued to fall. And even as it tries to save money and personalize the experience of buying clothing and cultivating personal style online, Stitch Fix's first-quarter and full-year sales forecasts also disappointed investors.

Management said it expected sales to return to growth by the end of the company's fiscal 2026. For some analysts, that timeline was a bit too long.

"Given the aforementioned customer dynamics, management is planning for the company to return to positive revenue growth by the end of fiscal 2026, well beyond [Wall] Street's expectation prior to the print," William Blair analyst Dylan Carden said in a research note on Wednesday.

Over at Truist Securities, analyst Youssef Squali withdrew his price target on the stock, citing "recent volatility" in the share price. Stitch Fix's outlook, he said, "reflects significant ongoing headwinds to the top line."

"We are cautiously optimistic on the long-term prospects of the company's strategy, but we believe it will take time for the strategy to play out, and remain on the sidelines until we get a clearer line of [sight] into a resumption in growth of active clients (which the company does not expect until the back half of [fiscal 2026])," he said.

Shares fell 38% in early afternoon trading on Wednesday. The stock is down 32% over the past year, as a spike in food prices has left less room in consumers' budgets to spend on clothing.

When shoppers use Stitch Fix, they can receive personalized wardrobe selections from a stylist or buy clothing directly from the company based on its website's recommendations.

But during the company's earnings call on Tuesday, executives said it hadn't adapted to changes in clothing demand quickly enough. Along with the drop-off in demand, fast-fashion and online influencers have forced retailers to anticipate changes in trends more rapidly.

In response, as executives explained on the call, the company has cut costs and staff and shuttered its U.K. operations and some warehousing facilities. It has invested in artificial intelligence and tried to make it easier for customers to convey their clothing and price preferences.

The platform has also created fashion profiles for customers - called StyleFiles - as well as profiles of the stylists who help them select clothing. It has increased the number of clothing items shoppers can receive in a shipment - from five to, in some cases, eight. And it said it had taken steps to make it easier for customers to change up their clothing selections more quickly and added "thousands of new styles" to its selection.

"At Stitch Fix, we know more about our clients on Day One than many retailers could aspire to know over the course of their relationship," Chief Executive Matt Baer said on the company's earnings call.

Its turnaround efforts, he said, had helped increase engagement. However, he also said that "transformations take time."

Still, other analysts remained skeptical.

Stitch Fix's first-quarter guidance "suggests the U.S. apparel consumer spending environment deteriorated in the last couple of months (August and September). This likely comes as a mild negative surprise to the market and could weigh on the group," UBS analyst Jay Sole said in a note on Tuesday.

"At the same time, the market may assume [Stitch Fix's] issues are company-specific and thus not see a big read across to the rest of the space," he wrote.

-Bill Peters

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09-25-24 1426ET

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