The Pros And Cons Of Stitch Fix, According To Barclays

Stitch Fix Inc SFIX, an online personalized styling service company, saw its shares close a hair above the IPO price of $15 on its Nov. 17 Nasdaq debut. The stock has since settled higher in the $23 range. 

The Analyst

Barclays' Ross Sandler initiated coverage of Stitch Fix with an Equal Weight rating and $26 price target.

The Thesis

Despite intense competition in the apparel e-commerce space, Stitch Fix managed to achieve critical mass along and "sizable" market cap with a defensible business model, Sandler said in the initiation note. (See Sandler's track record here.) 

But Stitch Fix still has several concerning factors that prevent a bullish stance at this time, he said. 

The analyst listed the following four reasons to like the stock:

The company operates within a large and underpenetrated $400 billion apparel retail space.

Stitch Fix is a curated service that leverages big data.

The company has a disciplined management team.

Expectations for increased market share come from expanding price points, new categories and an expansion beyond five items per fix.

Some of Stitch Fix's risks are, according to Sandler:

The Women's category has seen a sharp deceleration in growth from 113 percent in fiscal 2016 to 27 percent in fiscal 2017.

A subpar marketing efficiency with a focus on longer payback mediums like TV.

The possibility that the total addressable market will shift to only high-income, fashion-focused women.

The price could create a low retention rate.

Finally, the analyst's $26 price target is based on 1.7x calendar 2019 revenue ,which is a premium to its closest peers — a premium Sandler said is justified given its "history of cash flow generation and its unique business model."

Price Action

Shares of Stitch Fix closed down 1.83 percent at $23.54 Tuesday. 

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