It has been about a month since the last earnings report for Stitch Fix (SFIX Quick QuoteSFIX - Free Report) . Shares have lost about 4.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Stitch Fix due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Stitch Fix (SFIX Quick QuoteSFIX - Free Report) Q3 Loss Narrower Than Expected, Sales Up Y/Y

Stitch Fix posted robust third-quarter fiscal 2021 results, wherein both top and bottom lines improved year over year and came ahead of the respective Zacks Consensus Estimate. To top it, management raised its net revenue guidance for fiscal 2021.

For fiscal 2021, management now projects net revenues in a band of $2.07-$2.08 billion, indicating 20.9-21.5% growth from the year-ago period. Earlier, management projected net revenues of $2.02-$2.05 billion, suggesting an increase of 18-20% from the year-earlier period. The company expects adjusted EBITDA of $25-$30 million for fiscal 2021 and adjusted EBITDA margin in a band of 1.2-1.4%.

Quarter in Detail

Stitch Fix reported a loss of 18 cents per share, narrower than the Zacks Consensus Estimate of a loss of 27 cents. The company reported a loss of 33 cents in the prior-year quarter.

Meanwhile, the company recorded net revenues of $535.6 million, reflecting a surge of 44% from the year-ago period.  Moreover, the metric surpassed the Zacks Consensus Estimate of $511 million. The top-line results also exceeded management’s guided range of $505-$515 million.

Active clients of 4.1 million rose 20% from the prior-year quarter’s level. Sequentially, the company’s active clients went up 234,000, marking the second-highest quarter-over-quarter increase. This can be accountable to strong Fix demand, re-engagement of old clients and reduced dormancy rates (as the company lapped the pandemic-led weakness in the year-ago period). However, net revenue per active client declined 3% year over year to $481, though it increased at an equal rate on a sequential basis. The year-over-year decline was mainly due to elevated new client growth.

During the quarter, the company witnessed solid demand for its Fix offering from first-time as well as reactivated clients. Further, Stitch Fix saw better success rates across the Women’s, Men’s and Kids categories on a year-over-year and sequential basis. Markedly, management expanded the availability of Fix Preview to its entire client base in the U.K. as well as to more than half of its U.S. clients, and experienced impressive response. Apart from these, the company introduced Shop by Category to the current clients, helping them to shop more conveniently, with personalized recommendations in every category.

During the quarter, gross profit surged 62.5% to $246.4 million. Additionally, gross-margin expanded 520 basis points (bps) to 46%, representing the company’s greatest quarterly gross margin since fiscal 2017. The year-over-year jump was backed by enhanced inventory and reduced merchandise costs. Sequentially, the gross margin grew 310 bps, thanks to a fall in merchandise costs and lower transportation costs. Advertising, as a percentage of net revenues, increased 80 bps from the preceding quarter to 9.1%, while it fell 110 bps from the same period last year.

Meanwhile, selling, general and administrative (SG&A) expenses increased almost 37% to $270.6 million. Excluding advertising, other SG&A expenses, as a rate of sales, declined 160 bps year over year to 41.4%.

Furthermore, the company reported adjusted EBITDA of $11.6 million in the quarter under review against negative adjusted EBITDA of $20.7 million in the year-ago quarter. The upside reflects increased revenues, an enhanced gross margin and efficient advertising spend.

Other Financial Aspects

Stitch Fix ended the quarter with no debt, along with cash and cash equivalents of $124.7 million and shareholders’ equity of $429.4 million.

Further, the company used $35.1 million worth of net cash from operating activities during the first nine months of fiscal 2021. Also, it reported a negative free cash flow of $58.8 million for the same period.

Outlook

The company is witnessing a revival in apparel demand, as consumers have started to move out with coronavirus-related curbs being lifted and vaccination drive gathering pace. Stitch Fix continued rolling out new product features in the third quarter in order to improve offerings as well as boost client adoption. The new clients fueled momentum in the third quarter, which is expected to continue in the fourth quarter as well. That said, the company is witnessing tough labor market competition.

For the fourth quarter of fiscal 2021, Stitch Fix expects net revenues of $540-$550 million, which suggests year-over-year growth of 21.8-24%. Adjusted EBITDA is envisioned in the bracket of $15-$20 million and the adjusted EBITDA margin is expected to be 2.8-3.6%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 30.89% due to these changes.

VGM Scores

At this time, Stitch Fix has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Stitch Fix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.