Stitch Fix's Big Earnings Beat And 40% Stock Pop Not Enough To Convince Some Analysts

Online personal styling service company Stitch Fix, Inc. SFIX reported fiscal first-quarter results highlighted by a 10% revenue growth that helped contribute to a surprise profit. But not all of Wall Street is convinced this marks the early stages of sustainable growth moving forward.

The company reported first-quarter earnings of 9 cents per share, which beat the analyst consensus estimate by 29 cents. The company reported quarterly sales of $490.40 million, which beat the analyst consensus estimate of $481.17 million by 1.92%.

The Analysts: Needham analyst Rick Patel maintains a Buy rating on Stitch Fix's stock with a price target lifted from $46 to $55.

Morgan Stanley analyst Lauren Schenk maintains an Underweight rating on Stitch Fix' with a $25 price target.

KeyBanc Capital Markets analyst Edward Yruma maintains an Overweight rating on Stitch Fix with a price target lifted from $36 to $56.

Related Link: Stitch Fix Reports Big Q1 Earnings Beat, Active Clients Up 10% YoY

Needham: 'Self-Help' Story Playing Out: Stitch Fix's surprise beat takes a back seat to more important metrics like accelerating active client growth, Patel wrote in a note. The market has expressed concern with client growth in recent years but exiting Monday's report there is reason to believe this bear thesis is being dismissed.

Patel said Stitch Fix's growth can be attributed to successful investments in marketing, merchandising and continued success with Direct Buy. Management is presenting a compelling"self-help" story and has more initiatives in the works, including Fix Preview that should help the company realize higher keep rates and revenues and help improve the product assortment.

Morgan Stanley: Growth At A High Cost: Stitch Fix's "better than feared" top-line growth needs to be put in perspective as the growth is "becoming more expensive," Schenk wrote in a note. Specifically, management guided its fiscal second-quarter EBITDA much lower than expected at negative $6 million to negative $3 million versus the consensus estimate of $26 million.

Management sees an "opportunity to invest" in its business and will boost its marketing spending by more than 70% as the holiday season is traditionally slow. In addition, if Stitch Fix grows active clients by 12% year-over-year in the fiscal second quarter, the math behind management's spending outlook implies an 18% increase in marketing spend per active customer.

"We question whether or not this spend is actually higher ROI as overall marketing spend per customer continues to increase … calling into question the CAC [customer acquisition cost] dynamics of this business as it enters an even more competitive segment of the US apparel market," the analyst wrote.

KeyBanc: Unlocking 'Significant' Opportunities: Stitch Fix kicked off its new fiscal year with a "strong start" with more than 3.8 million active clients, Yruma wrote in a note. The strong new customer growth suggests the company is winning market share from traditional retailers as people are shopping less in stores and more online.

Looking forward, Yruma said Stitch Fix's initiatives like Direct Buy and Plus could unlock "significant" opportunities to expand its total addressable market. Direct Buy alone is showing return rates at half of the traditional e-commerce companies while penetration is increasing across current clients. The Plus initiative is one of the most underserved categories that stands to benefit by default of store closures at rival Ascena.

SFIX Price Action: Shares of Stitch Fix were trading higher by more than 36% to $48.96, and earlier hit a new 52-week high of $54.94.