Thanks for all the discussion. I agree with mekong that SFIX revenue growth (34-37% revenue guidance) and gross margins of 45% are comparable to some other companies discussed on the board, but they have the disadvantage of managing inventory. As such, we will never see EV/Sales ratios like CRWD, ZM and other software names discussed here. But SFIX trades as an EV/Sales of around 1 and has traded well above a 2 EV/Sales ratio.
Karen’s posts on the SFIX premium boards have been very helpful in convincing me to invest. It’s good to see that customers enjoy the service and get first hand accounts of the improvements they keep making to the service. They are refining their process thanks to their data and constant experimenting. With their user growth and entering new markets, their data advantage is only going to grow and allow them to continue to better target customers and increase the average spend per customer (an increasing metric with avg users spending 7.7% more YoY).
Switching back to the long term, what if SFIX flounders to ever become profitable? I don’t think it’s likely, but they’re not a software company, and so margins are not a given. I’m pretty sure their gross margin is actually very good for the industry…which leads to questions about whether it’s sustainable. I know it’s growing now, but how/why it’s so high is worth exploring.
SFIX has been focused on growth and has been investing aggressively to expand into new markets. With the recent launch in the UK, it incurred startup and marketing costs and even so, they were profitable (7 cents EPS) and cash flow positive. And unlike most software companies discussed here the 7 cents EPS is after taking out stock based comp. If you remove one time launch costs and SBC, the earnings would look even better. You’ll notice that over the last year their gross margins have improved from 43.6% to 45.1%. Part of the reason for the increase is their use of Exclusive Brands (EB), SFIX’s clothing line. This is similar to Amazon seeing which of their 3rd party products sell best and then making it themselves and cutting out the middleman. EB will allow SFIX to continue to improve their margins. Their data/experience will also allow them to continue to become more efficient and reduce costs as a percent of revenue. However, SFIX is going after a huge opportunity and therefore is not overly focused on profit. The US and UK online apparel, footwear and accessories market is expected to go from $93B today to $178B in 2023. There may be concerns about buying clothing online, which is why the vast majority is still bought in stores where they can be tried on. People are getting more comfortable buying clothing online, but with SFIX’s data they can better fit their clothing to their specific customers. Competitors that do not have this wealth of data will struggle with fit as customers have different body types and most clothing will not fit the same regardless of the size. This is a key differentiator (as Karen pointed out on the premium boards). Not only is this massive opportunity with the US and UK market close to doubling in the next 4 years, but SFIX has a significant advantage for one of the bigger roadblock to buying clothes online.
I think I can see both sides here. Schrodinger’s cat is still in the box. With a solid quarter, it’s possible the market could see that they’re growing nicely, doing what they say they’ll do, and the shares could get a good bump up. Or the market might not favor them until they actually show the profit – whenever that is. If I had to guess, I think it’s the latter. I don’t think the market will suddenly send the stock soaring just because they show slightly better revenue growth.
Although SFIX will remain profitable, their focus is not profit maximization in the short term. Their focus should be on growing revenue. This is what they have been doing as you can see in the sequential revenue growth from 23.1% in Q1 to a projected 34-37% for Q4. This has come at the expense of profitability as their SGA went from 40.6% of revenue in the prior year to 46.2% of revenue in the latest quarter. I think analysts recognize this as there were several price target increases after the last earnings announcement based on the higher revenue growth despite reduced profitability.
But, if they beat on revenue AND beat big on EPS, I could certainly see a big bump up when they report.
As I mentioned above, I think the focus is on revenue growth although management did guide for improvement in EBITDA. I do agree that we could see a big bump in the stock after they report on 10/1. During each of their last two earnings announcements, the stock ran up over 20%. This was when the stock was trading at higher valuations and reported less revenue growth. As I mentioned before, I think the market is too concerned about Amazon, so if they guide for good revenue growth, I expect the stock to pop.