Stitch Fix Falls After Piper Jaffray Downgrade; Analyst Says 'Smallest Hint Of Pressure' Could Threaten Valuation

Some bulls are taking a breather on Stitch Fix Inc SFIX after the firm’s 125-percent year-over-year run.

The Analyst 

Piper Jaffray analyst Erinn Murphy downgraded the stock to Neutral and raised the price target from $29 to $43.

The Thesis

The analyst admitted a bullish outlook on Stitch Fix’s fundamentals. (See Murphy's track record here.) 

“We continue to like the development of the business model, appreciate its value for softlines vendors in addition to customers and acknowledge management's execution YTD,” she said in the downgrade note. 

Maintaining the current valuation demands a high degree of execution, Murphy said. To justify the stock’s heights, Stitch Fix would need to evade competitive threats, decelerated consumer spending, rising costs for customer acquisition and moderating full-price sales, the analyst said. 

“Bottom line, at current levels, we believe the smallest hint of pressure from any one (or multiple) of these factors could be a significant negative catalyst for SFIX shares." 

As Amazon.com, Inc. AMZN ramps advertising for Prime Wardrobe and tests a personalized recommendation service and Nordstrom, Inc. JWN retargets its Trunk Club, such threats appear imminent, according to Piper Jaffray. 

A $50 valuation requires significant reacceleration of absolute revenue growth and earnings-before-interest-and-tax margins around 14 percent, Murphy said. While the analyst said she expects modest acceleration in revenue, the latter achievement has rarely manifested among Stitch Fix’s peers.

“While SFIX's high full-price selling ratio is a positive, broader customer-product mix is a risk to that ratio over time,” the analyst said. “Further, we believe upward pressure on shipping costs and CAC are undervalued risks to terminal margins.”

Price Action

Stitch Fix shares were down 14.34 percent at $40.36.  

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Photo courtesy of Stitch Fix.