Stitch Fix drops after earnings, as analyst sees lock-up bringing more pressure

Shares of Stitch Fix (SFIX) dropped in morning trading following the company's quarterly earnings report. The personal shopping and clothing provider saw revenue come in above the Wall Street consensus and posted a 31% year-over-year increase in active clients. Following the earnings report, an analyst at JPMorgan estimated that about 31M shares will be released from lock-up on Wednesday, which could create near-term weakness. EARNINGS AND GUIDANCE: After the market close on Monday, Stitch Fix reported second quarter adjusted earnings per share of 7c, slightly exceeding analysts' 6c consensus, though its EPS including items was 2c. Revenue for the quarter of $295.5M beat the $291.24M consensus and Stitch Fix said it grew active clients to 2.5M, an increase of 588,000 and 31% year-over-year. Looking ahead, Stitch Fix forecast third quarter revenue of $300M-$310M, at the high end of analysts' $300.29M consensus, and fiscal 2018 revenue of $1.19B-$1.22B, against the Street consensus of $1.2B. On its quarterly earnings conference call, Stitch Fix said its net revenue per active client for the 12 months ended January 27 was $437, a decrease of 3.9% vs. last year. The company commented, "This decline was primarily driven by our continued and growing strategic expansion into Men's and lower price point merchandise. Although our male clients on average have a lower purchase frequency, which dilutes our overall net revenue per active client, we continue to be pleased with the revenue contribution and profitable unit economics of the Men's category. Similarly, we've been encouraged by our ability to serve lower price point clients effectively and plan to further penetrate this market." WHAT'S NOTABLE: Stitch Fix's quarterly earnings report was its second as a public company. The company's IPO in November was overshadowed by the disappointing IPO of another subscription service, Blue Apron (APRN), as well as a threat from Amazon's (AMZN) Prime Wardrobe and Nordstrom's (JWN) Trunk Club. Stitch Fix, which debuted at $15 per share, has seen its shares gain over 50% since November. ANALYST COMMENTARY: In a research note to investors, JPMorgan analyst Doug Anmuth estimated that about 31M Stitch Fix shares will be released from lock-up before the market open on Wednesday, March 14, which could create near-term weakness. Anmuth explained that Stitch Fix's IPO held a price-triggered lock-up agreement where 35% of the locked-up shares become eligible for release beginning 90 days after the IPO if certain criteria are met, including shares closing 25% or more above the IPO price on 10 out of 15 consecutive trading days and if the company is not in its trading black-out period. The analyst noted that Stitch Fix qualified for the price and reporting threshold last month, but since this occurred during its black-out period, shares do not qualify for release until one day post-earnings. While Anmuth remains confident in Stitch Fix's market opportunity and ability to stabilize growth, he thinks growth will become more challenging as the company has passed the period of heavy viral growth and margin compression is likely through fiscal 2019. The analyst has a Neutral rating and $26 price target. PRICE ACTION: Shares of Stitch Fix are down 3% to $23.50 in morning trading.

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