It's worth pointing out that SFIX had surged by more than 160% from its IPO price. So, with many traders sitting on substantial gains, the disappointing report is motivation for some to lock in gains and take profits off the table.
Before diving into its outlook, first the good news. The company posted EPS of $0.18, easily surpassing the $0.04 consensus. In fact, that was SFIX's biggest EPS beat since going public by a wide margin. Also, Adjusted EBITDA of $11.1 mln came in at the high end of its guidance range of $6-$11 mln. On a year/year basis, Adjusted EBITDA surged by over 350%.
Furthermore, gross margin of 44.4% was its highest quarterly figure in FY18, up 90 basis points year/year. The improvement here was driven by a decrease in inventory reserve, lower clearance expense, and reductions in shrink.
The company also did a good job managing expenses, illustrated by SG&A as a percentage of revenue declining by 140 basis points year/year to 32.8%, mainly due to warehouse efficiencies and leverage of non-payroll expenses. All in all, the bump in gross margin, together with the improvement in SG&A costs, demonstrate that SFIX is executing well and taking a responsible approach growing the business.
On the topic of growth, revenue grew 23% to $318.3 mln, which is towards the high end of the $310-$320 mln guidance it provided during its Q3 conference call. However, it was merely in-line with the consensus number. Since SFIX had exceeded analysts' revenue estimates in each of its first three quarters, and with growth decelerating a bit from the 29% performance last quarter, this change is also weighing on the stock.
Still, SFIX is growing at a solid clip as its active client count grew by 25%, or, 548,000 accounts, to 2.7 mln, following growth of 29.6% last quarter. The company also launched Stitch Fix Kids during the quarter, expanding its total addressable market. Although Kids didn't contribute meaningfully to Q4 results, management commented during the conference call last night that it is receiving strong interest from existing clients, with encouraging early feedback on the new products.
As we noted above, it is SFIX's outlook that has the stock tumbling lower this morning. Specifically, it guided for 1Q19 revenue of $354-$360 mln (20% at mid-point) and EBITDA $5-$9 mln versus the $11.6 mln estimate. For FY19, the company expects revenue of $1.47-$1.53 bln versus the $1.49 bln consensus, and EBITDA of $20-$40 mln, well below the $47.6 mln consensus.
When asked about the slowing top-line growth on the call last night, management commented that its annual guidance still falls within that 20-25% growth range, which is where the company has been over the past couple of years. It also remains committed to balancing profitability and growth.
Regarding the downside EBITDA outlook, SFIX says that its guidance reflects the same dynamics it experienced in 2018, but, that the launch of new categories like Kids, Plus, and Men's will have a dilutive impact on the overall business. These new categories carry lower gross margin than its more mature product lines. Over time, the company should see a rebound in gross margin as these new categories ramp up.
To conclude, there were a number of positives related to SFIX's fourth quarter. Namely, improving margins, impressive net income and EBITDA growth, and strong cash flow generation. All of these metrics show that the business is well-managed. But its guidance does indicate a slowdown in growth from both a revenue and profitability standpoint. With the stock up so sharply over a relatively short period of time, any negative change in the growth trajectory is likely to have a profound effect on the stock, which is what we are seeing today.