Stitch Fix Spikes as Analysts See Upside From Direct Buy Program

(Bloomberg) — Stitch Fix Inc (NASDAQ:). shares surged in pre-market trading on Tuesday, after the clothing-subscription company gave a profit forecast that beat expectations.

Analysts were broadly positive on the results, with a number of firms raising their share price targets. Wall Street was particularly optimistic about the company’s direct buy program, which is expected to add a tailwind to revenue growth. Telsey Advisory Group found “a lot to like” in the quarter, but singled out direct buy, which has shown “early signs of success in supporting revenue per customer growth.”

The stock gained about 12% before the bell, and the pre-market rally suggests that Stitch Fix will recover much of the ground it has lost over the past several months. Shares have dropped more than 20% between a peak in late June and its most recent close, although it has jumped about 40% since an October low.

Here’s what analysts are saying about the results:

Telsey Advisory Group, Dana Telsey

“There is a lot to like” in the results, including customer growth and “a continued acceleration” in revenue per customer.

Direct buy has shown “early signs of success in supporting revenue per customer growth, while the inventory optimization algorithm has led to better success rates and supported the gross margin improvement.”

Outperform rating, price target raised to $33 from $29.

SunTrust Robinson Humphrey, Youssef Squali

The results “show strong execution” while the guidance “imply sustainable positive trends” over the short and medium term.

Direct buy is “driving incremental demand and profits, and setting up SFIX for a 15%+ revenue CAGR for the next 5 years.”

Buy rating, price target raised to $38 from $36.

KeyBanc Capital Markets, Edward Yruma

Stitch Fix’s inventory optimization algorithm is “driving strong financial performance,” while direct buy “remains an important top-line driver.”

Overweight rating, $34 price target.

William Blair, Ralph Schackart

“Management is executing well on expanding the service offering,” and the better-than-expected profitability is encouraging.

“While the stock remains relatively inexpensive on traditional metrics,” the firm still sees risk surrounding active client growth.

Market perform rating.

Piper Jaffray, Erinn Murphy

Stitch Fix’s EBIT margins remain “well below the LT target of 10%-12%,” despite gross margins approaching long-term targets.

The direct buy program “still has some friction points,” and Piper “will be monitoring how scaling Direct Buy impacts the balance between new customer growth vs. spend per customer and how effectively it can engage lapsed customers.”

Neutral rating, price target raised to $22 from $16.