Will Stitch Fix Continue to Deliver?
It's Tuesday March twelfth welcome to market fully. I'm Matt Greer. And joining me in studio, we have motley fool analyst Andy cross and Ron gross gentlemen. Welcome. How are we doing? Hey, guys. Hey, MAC, great. How are you? I'm good. I'm feeling good. I'm feeling better than Dick's sporting goods. Getting ready to there you go. I am right. Single is for kids. And we're also gonna talk about the internet celebrating a big birthday because let's begin with the world of high fashion. You know, we're all fashionable guys, you know. Okay. Okay. Maybe not. But let's talk personalized apparel. Let's talk stitch fix shares up more than twenty five percent of the time of our taping on stronger than expected earnings and some upbeat guidance now guys stitch fix now has almost three million active clients that's up eighteen percent year over year, and Ian, Ron what do you think? Well, it was it was a good quarter clients as you mentioned active clients grew eighteen percent revenues grew twenty five percent. We talked about this at of the YouTube live last week. And I said anything above twenty four percent. I think would be pretty well received by the by the investors in the street and clearly today, it was profits. They came in at twelve cents per share that was more than that was more than seven cents last quarter and far above estimates. And the guidance for the quarterback was pretty good. So overall pretty nice quarter for stitch fix. We have to remember last quarter. They reported growth at wasn't quite as well. Received and the stock really got hit. So this is a lot of kind of rebounding off of those lows stock has has climbed back from those lows. But this was a continuation of that the talk and the the conversation with Katrina lay who owns more than thirteen percent of the company. She's the co founder of the business allow the conversation was that the year is looking pretty good and that growth for the year is somewhere revenue growth somewhere in that twenty five twenty six percent range, which is an excel array shin off the last couple of quarters, so growth picture, really pretty healthy MAC, the cost side is what I was watching because the sales in general administration costs really exploded of during the quarter and that kept profits about flat. But really investors are really much more focused on the revenue growth. Ron now this stock is heavily shorted. Meaning that there are a lot of lot of shares that essentially were betting against the stock. So when we look at a run up like this how much of this do we? Do we think is because the business is really improving, and how much of this is people covering those short positions people who are like, wow, probably gonna bet against the stock. Well, if you see things improving n you're short and you're betting against the stock. Then you want to cover your at you wanna stop betting against the stock and a influx of buying happens. As a result of that. That's commonly known as a short squeeze. And you don't wanna be on the on the other end of that being held short the stock when the stock is skyrocketing up twenty five percent now it depends on a case by case basis. How much stocks increase is caused by short squeeze. It's almost a guess we won't know until we see how many shares are the short shorts. Sorry. The how many shares held short a decrease. But I would guess in a case like this seventy five percent. Plus of the increase in the stock is a result of short sellers covering their short. So for for reference sake, the number. Of stocks shares sold short compared to the company's float. So that's basically this shares that are available for trading was thirty percent. So that's a very high number which tells us that there are a lot of shares against a lot of investors betting against stitch fix running up to this quarter. And when the stocks are some move if they have to go out and cover those shorts. They had to buy the stock in the market that continues to put more and more pressure on the short. So more more people bidding up the stock and that continued us in the stock higher and higher. So I think I think Ron's right at the good part of today's move was because of that that short squeeze. I just look at the numbers. And I say, hey was a really nice quarter. The growth is continuing for Katrina lake and for stitch fix. There's a lot of competition there to math like Amazon wardrobe is out there. Now, they're doing a lot more advertisement, but stitch fix the algorithms their building they have more than one hundred data scientists out there. They're continued to build out their offerings in the United Kingdom, which. Adding to their cost structure. So they continue to make the investments that they need to be able to compete in a very competitive. Marketplace remember short and can be a pretty risky proposition. Right because stock and theoretically go up to Infinity, but if you're long stock can only go down to zero so you theoretically have an unlimited loss potential. If you're short a stock. And that's why you don't wanna let things get too far out of hand. And you end up seeing people come back into the market closing their shorts and buying the stock. Okay. So let's talk about the business a bit more because I confess that I'm a bit of a stitch fix skeptic. I I know it's it's kind of unfair. But I think that a little in the same vein as I think of blue apron where you're delivering stuff to me. Sometimes I'm not going to use it. I have to send it back. Not not the case with blue apron. But is is there really a big enough market here? And the other thing is you have this whole simplicity. Does it bring me joy movement and stitch fix in the business of getting you to buy more stuff? I'm I'm a skeptic as well, Andy, correct me because. I'm not an expert on the stock. But I think it's all really about proving out this algorithm. They have it's a technology. The technology could actually be used to sell anything, really probably. But I think investors once they feel comfortable with this algorithm. You could see the stock really start to move. But until that happens everything everybody's kind of wait and see I think this was Costco's stitch fix MAC would be all over it. I think generally, you're right there. It's a it's a very large market. We still by amount of third of our payroll online, what they are trying to do is get as they get more and more of these three million active customers, and these people of used stitch fix in the past year continuing to put in more and more data the data and the outlier them smarter and smarter the revenue per user, which by the way saw concede continues to see some excel ration- in these growth, which is really good. As you use stitch, fix more, more, you spend more and more with them. So yes, MAC it is a little bit of like suspend more retail does basically that's their job. They're trying to get us spend, more and more. You think Amazon's not sitting out there trying to guess spend more and more course, they are. So stitch fixes algorithms are doing that. They're having some success there contingency very healthy retention rates. And in the marketplace data is going to win this game. I think we look out five ten years, we will be spending more and more of our dollars when we have to buy clothes using more sophisticated algorithms than just getting our car and going to Costco, but Costco, steel, obviously, a great company rates, doc. Okay. So as we wrap up here one one of the ways that they arrive at that algorithm. Is they actually ask you questions as you're filling out your profile about your fashion sense? So in that vein, I'm curious. How would you characterize your fashion sense, Ron gross in a word? Andy cross I want you to be thinking about that as well. Unexciting? Okay. It's nineties with an edge. Oh, I like that. I like that nice about you. How about you MAC? I have three words I had predictable uninspired in blue. Wow. So and cart. That's that's the other problem. I think stitch fix would be more appealing to me if they would just send me like five blue shirts every month. Yes, they will you can give them ninety data points, and you sign up MAC, and and they'll they'll send you lots of blue shirts. Okay. And when we look at the stock it has been a total roller coaster went public in twenty seventeen around. Fifteen bucks got his highest fifty and then fell all the way down to seventeen today on today's pop trades in the mid thirties. So going forward over the next five years does this stock beat the market? I think it does. Here's here's my Ron had mentioned a little bit about the danger being short. I will say stitch fix his volatility. The stock is about three times as volatile as regular stock market. So you have to be able to sit through the ups and downs. But I think long term over the next five years to fix a winner. So, but maybe not a good fit for all of us. Okay. So let's move on to Dick's sporting goods. Shares down Tuesday on earnings down. Big Ron falling profits falling sales falling same store sales. That doesn't sound great. Not a great quarterback canal. I'll do a little bit of adjusting care because there was a fifty third week in fiscal twenty seventeen. So there'd be fair. We'll adjust for that. Even when you do still not a great quarter. Same store sales down two point two percent net. Sales down six point five percent one bright spot. I think we can say we commerce sales up seventeen percent now account for twenty three percent of total sales versus nineteen percent in the fourth quarter twenty seventeen so making some headway online guidance was somewhat tepid, but interestingly they did raise their dividend. Twenty two percent that that rate you get a dividend yield about three point one percent for. So for those looking for yield not too shabby. But of course, you always have to be concerned about total return because if you're getting three percent yield, but the stocks going down, it's not really something you should be too excited about. So we got to keep an eye on the business. They did buy some. Stock back over the course of the year at reasonable prices. I think so they've got to turn the ship. A bit though, not not a great quarter in Ron last year after the parkland shooting Dick's announced that they're gonna stop selling firearms to buyers under the age of twenty one and they also pulled all of their assault style rifles. And now today they came out and announced they're going to be removing guns from one hundred twenty five stores. We don't know which stores that specify that. But they said in markets where the hunting category underperforms. Yeah. They did see some weakness when they did it back after parkland, which I guess makes sense the revenue in though in some markets did go down, and I will anticipate that this will have an an additional effect causing revenue to go down, even though they're strategically closing under performing markets where that category may have not been so robust, but you'll probably see additional dips, but you know. They're making they're making a moral political and ethical. I don't know what word you wanna use principled stance and more power to them, depending on your politics. You hear either happy or you're not but plugged them for for making a decision. It's still, you know, still got a way to go. If they're going to roll out across the board because there's more than seven hundred dick sporting goods stores, and this is only one hundred twenty-five, but baby steps perhaps and looking out over the last five years shares down big they've lost the market. What do you think about the next five years on, you know, the stock looks cheap at eleven times earnings and the three point one percent dividend yield. But I just get worried here you you might make some money in the stock over the long term. I don't think it would be a market beater, though, Andy when you think of dick sporting goods is at Amazon proof now, it's not I think when you look at their inventories are growing six seven percent this past quarter and the revenues falling. That's tough signed for Rita. Taylor. So I think we saw some of the struggles they have with some of the larger brands especially in the athletic goods over the over the years, and that's just going to be a tough spot. I think I plod them for the initiatives they're making. But overall, I think Dick's will be probably be less relevant over the next five ten years today. And that's the way the ball bounces. Guys. That is genius. You didn't. Fit exaggerate go back to the fix. I'm kidding. Okay. So let's wrap up with a happy birthday to the World Wide Web thirty years ago. An English software engineer named Tim burners lease omitted, the idea at a physics lab in Switzerland. And the rest is history. Now, Ron we're talking before the show, and you're recounting your early days as an internet endless. Those are the days MAC, it was nineteen Ninety-six simpler, time outdoor just invented the internet. No, it was nineteen Ninety-six. I was an internet analyst. I wanna say for less than a year during a time where there weren't many internet's knocks out there. It was a combination of telecom equipment and the technology behind the internet and internet stocks. Remember, I followed America Online, Netscape and light coast and exciting the dog. It was it was it was a really interesting time for this new thing called the internet, and none of us knew much about it. But it was pretty exciting. Stuff. It basically brought me here. I was an analyst at investment firm in Pennsylvania in ninety five when I think Netscape and Yahoo both went public and was studying a media, and and food and beverage companies, and I was like, wow. This interesting is kind of interesting. And then I knew Tommy David were starting head of the motley fool, and we're on AOL and pushing over to the worldwide web, which was exciting in unknown area with like JAT rooms and all this self publishing adventures by consumers and just seemed like an exciting place for investors to be in. I think I I met David and Tom nine hundred ninety seven I was producing TV show in Washington DC, and they were on Halloween. And I remember David talking about this company that books online called Amazon. And I thought you know, this guy is kind of cuckoo for cocoa. I had a perfectly good books million. Just right down the street. I mean, really I like online books. I don't think that's going to work. Wanna do on circle? Yes. Yeah. Turns out on. It was on panned out pretty bad. Old. Do you have a favorite? We're talking a little before the show. Do you have a favorite early website something you're Daljit for? I mean, well mine will always be keyword fool AOL and then heading over keyword fool and full dot com. I remember us creating our first website at the first online website. Not a oh, well, this is ale was really the dominant player online. And as the the World Wide Web started to grow and just thinking about the way, we design that web late night sessions surrounded by a couple of six packs of beer, and and then just what that looked like compared today, which is a lot of fun to think back, but that those are certainly exciting days with what was happening on the investing landscape because just quick reminder reminder back, then individual festers were basically treated like the bottom of the barrel and were the motley fool was really trying to advocate for them. And so many ways this is a great chance for us to to spread. Our message. My space baby mice mice face. I wanna sit. I thought your how about how about hamster dance a hamster Vance ever. But I'd never you just all these hamsters that would just kind of dance back and forth. It was it was basically a space invaders version two point. Oh, I guess ask Jeeves was pretty cool because it was like the. Kinda siri. Yeah. And it had the it had like the Butler. So it's better than web crawler web crawlers the first surgeon, and it's like a spider with a magnifying glass, don't crawl if you're gonna don't I don't want to search engine to be called like manatee. It wants something fast. It's funny as we're talking about this. I think this was at the time when the guys Google were basically at the university of Michigan designing all their better algorithms. Really back then and named crawling there. They're in the as they are developing this and seeing what's happening in the public markets. And then all of a sudden, they're, you know, ten years later, they're going public and and now worth billions. So as we go back thirty years to the invention the birth of the internet nineteen eighty nine first episode of the Simpsons, which is still running. Okay. Wow. Top the music charts paradise city by guns and roses. What I am by April, the new bohemians, and yes, Milli vanilla girl. You know, it's true. Track with an edge baby nineties with an nineties with an edge. Okay. So as we wrap up here, it's the desert island question do not invest this way at home, but if you're on a desert island, and you've got some free time, and you've got a few stocks. You've got some investment choices, and you've got a buy and hold because you're going to be there for a while. So you've got to pick one of these for the next five years. Let's go stitch fix dick sporting goods or how about the SNP five hundred index fund. I was thinking ask Jeeves, but I'll I'll. Stitch fix. Wow. Okay. To to beat the market gross S and P five hundred all the way. Okay. Or if you have thoughts on anything, we've talked about if you have fashion tips, if you have stitched fix advice, if you have favorite old websites, or if you have an opinion on hamster dance. Let us. So great. They were hamsters, but they were dancing, Microsoft, paper clip. Oh clipping. That was never care. Segues? Okay. Market Philarete full dot com is our Email questions comments. Let us know market Hillary at flow dot com. Ron Andy, thanks for joining. Thanks as always people on the show may have interest in this talk about and the motley fool may have formal recommendations for against so don't buy or sell stocks may solely on what you hear. That's it for this edition of market fully the show is mixed by Dan Boyd. I'm macrey. Thanks for listening, and we will see tomorrow.