Stitch Fix's Stock 'Has Simply Run Too Far,' Wells Fargo Says In Downgrade

Online personal styling service company Stitch Fix Inc SFIX has seen its stock rise around 60% since the start of 2020 and the outperformance versus the S&P 500 index implies it "has simply run too far," according to Wells Fargo.

The Stitch Fix Analyst: Ike Boruchow downgraded Stitch Fix's stock from Equal-Weight to Underweight with a price target lowered from $27 to $18.

The Stitch Fix Thesis: The bearish case for Stitch Fix's stock is based on a lot more than just an overstretched valuation, Boruchow wrote in the downgrade note. The analyst notes four fundamental concerns in Stitch Fix's business.

First, fiscal 2020 marks the fifth consecutive year that EBITDA margin declined while EBITDA dollars are down by more than $100 million since fiscal 2016. But over the same time period, the company added almost nearly $1 billion in revenue. This implies that top-line growth isn't flowing through to the bottom line.

Related Link: Morgan Stanley Says Stitch Fix's Stock Could Fall To $25

Second, Boruchow said logic would dictate that as Stitch Fix grows its customer base, it would be able to take advantage of efficiencies in marketing spending. This isn't the case, as advertising as a percentage of sales rose from 7% in fiscal 2017 to around 11% now.

Third, Stitch Fix's top-line growth before 2020 was "generally strong" although this was likely due to new offerings over the past few years like "Style Pass" and "extras." As such, the core business is likely seeing a much slower rate of organic growth.

Finally, Boruchow said several high-level executive departures is a "cause for concern." CFO Paul Yee left the company in January and his interim replacement and COO Mike Smith more recently said he will resign to start a venture capital fund.

SFIX Price Action: Shares of Stitch Fix were trading lower by 2.8% at $38.30.