Shares of Stitch Fix (SFIX) are sliding after the company reported quarterly results that topped expectations, but said it expects second quarter active client count to be “relatively flat” sequentially. Citing a lack of visibility into active growth, William Blair analyst Ralph Schackart downgraded the stock to Market Perform, with several of his peers also cutting their price targets for Stitch Fix.

QUARTERLY RESULTS: Last night, Stitch Fix reported first quarter earnings per share of 10c and revenue of $366.2M, both above consensus of 3c and $357.97M, respectively. The company also announced active clients of 2.9M for the quarter, an increase of 22% year over year. Additionally, Stitch Fix said it sees second quarter revenue between $360M-$368M, with consensus at $362M, and adjusted EBITDA between $8M-$12M. For FY19, the company sees revenue of $1.49B-$1.53B and adjusted EBITDA of $20M-$40M. Further, Stitch Fix said it expects second quarter active client count to be “relatively flat” sequentially and advertising as a percent of sales to be lower in second quarter versus first quarter.

MOVING TO THE SIDELINES: In a post-earnings research note, William Blair’s Schackart downgraded Stitch Fix to Market Perform from Outperform, citing a lack of visibility into active growth, underpinning soft net addition guidance, and greater risk to out-year sales and earnings estimates. The analyst argued that despite his enthusiasm for Stitch Fix's "innovative model," for the second sequential quarter, the company missed on its key active clients metric. Last quarter, sequential net adds of roughly 54,000 came in less than the Street estimate of 128,000, he noted. Further, Schackart pointed out that management guided to flat sequential active client growth in fiscal second quarter, compared with the Street's expectation of an increase of 118,000 and despite the introduction of a new Kids category in the fiscal first quarter. Reiterating a Neutral rating on Stitch Fix’s shares, Piper Jaffray analyst Erinn Murphy lowered her price target on the stock to $20 from $23. While first quarter net additions were up 188,000 sequentially, the analyst said she is concerned that second quarter guidance implies active client adds flatten out, and added that she is surprised with the "no growth" assumption, particularly against several newer growth initiatives like men's and kid's. Citing similar concerns, her peer at Barclays also lowered his price target on the shares to $26 from $33. Analyst Ross Sandler reiterated an Equal Weight rating on the stock.

CONTINUED ‘GROWTH OPPORTUNITY’: This morning, KeyBanc analyst Edward Yruma also cut his price target for Stitch Fix to $38 from $45 due to customer net adds uncertainty weighing on the stock near-term. However, the analyst told investors that he thinks that “solid” net customer adds, improved LTM ARPU, and gross margin expansion point to the “continued growth opportunity.” He reiterated an Overweight rating on the shares. Also keeping an Outperform rating on the shares, RBC Capital analyst Mark Mahaney lowered his price target for Stitch Fix to $39 from $50. While its earnings beat consensus and revenue growth accelerated, the company's active clients of 2.93M were below the expected 2.95M, he acknowledged. Nonetheless, the analyst highlighted first quarter gross margins reaching a two-year high with a 140bps expansion and operating efficiency being improved by the "automation integration in the Phoenix fulfillment center."

PRICE ACTION: In late morning trading, shares of Stitch Fix have plunged almost 29% to $18.55. [Ed. note: closing price $20.54]