Don't Bet On A Rally In Stitch Fix, Invest In The Future Stitch Fix isn't out of the woods, but the stock is coming back into fashion after improvements in profitability showed up in the results.

Stitch Fix (NASDAQ: SFIX) popped following its Q3 results, but the rally may already be over. The news wasn't great; better than expected is the best that can be said, and the core driver of the surge, short interest, isn't going away. Near-term headwinds persist, and the path to profitability is hazy, an attractive combination for bears. However, the long-term outlook is much better. The stock is trading near long-term lows and showing signs of a bottom in tandem with turn-around efforts.

Additionally, Stitch Fix is an unassuming play on AI. That's right, the company is founded on AI and uses it to help predict fashions and choices for consumers. Considering that services will be the largest and fastest-growing segment of the AI industry and Stitch Fix is an established resource, it stands to benefit from the trends.

"We continue to focus on ways to drive efficiencies across our business while at the same time invest in the core capabilities that have set Stitch Fix apart from the beginning – personalization powered by our industry-leading data science and AI," says interim CEO Katrina Lake.

Stitch Fix Has Tough Quarter, But Evidence Of Improvement Emerges

Stitch Fix had a rough quarter, with revenue of $394.91 million falling nearly 20% YOY. The decline was driven by an 11% decline in active clients, amplified by a 9% decline in revenue per client. The revenue beat the Marketbeat.com consensus, which is good news; margin improvement is also present. The company delivered a net loss on a GAAP basis, but the -$0.19 in earrings is $0.11 better than expected. However, the adjusted EBITDA and FCF were positive and above the top-end of guidance, proving that cost controls are working better than forecast.

The guidance for Q4 isn't great. The company forecasts revenue from $365 to $375, below the consensus. The post-release action suggests the market feared much worse and had priced that into the stock. The company also announced additional cost-saving measures, which include exiting the UK business and closing 2 distribution centers.

The analysts were generally positive about the news, but it did not spark upgrades or price target increases. The takeaway from the chatter is that the results are encouraging, and the path to profitability is becoming clearer, but the company is not out of the woods yet and needs to correct the top-line trends. Improving profitability is good, but the company could dwindle to nothing without top-line stability. Until then, the 16 analysts with current ratings are Holding SFIX and see it moving to the $15.40 region. That is about 15% above the current action and has been steady for over a month, with no changes following Stich Fix's Q3 release.

Institutions Buy SFIX In 2023

The institutional activity is interesting. The institutions own nearly 70% of the stock and aren't selling. There is an active market and rotation within the group, but the institutions have been buying on balance for the last 12 months, and their activity ramped higher in Q1 and Q2 2023. That is consistent with a bottom that has begun to form in the stock chart.

The chart isn't pretty, the downtrend may not be over, but there are signs of bottoming. The price action bounced once from $2.90 earlier this year, and confirms that level as support now. If the market follows through on this signal, the price should move sideways from here with a chance of moving higher. The analysts are in a wait-and-see mode, so a complete reversal may not happen until later in the year or in 2024 when (if) the company can produce.