Stitch Fix Stock Could Be Further Knocked Down by This Pinterest Move

Shares of online personalized-apparel retailer Stitch Fix (NASDAQ: SFIX) have plunged 95% since hitting their all-time high in late January 2021. In 2022, they’re down 74%, as of July 1.

For context, so far this year, the S&P 500 and tech-heavy Nasdaq Composite, including dividends, are underwater by 9.1% and 28.6%, respectively. And shares of Amazon and athletic wear retailer Lululemon are in the red by 34.3% and 32.7%, respectively.

So while the market is having a poor year, Stitch Fix stock is having a much worse one. Investors have punished the stock because the company has struggled since its late 2017 initial public offering (IPO) to consistently grow revenue and turn a profit. Last quarter, its challenges intensified, as its number of active clients declined 5% year over year, and management announced that it was laying off about 15% of salaried staff.

Now Stitch Fix faces another potentially significant threat: Image-sharing platform operator Pinterest (NYSE: PINS) has acquired not just a Stitch Fix competitor, but one that also was co-founded by a former top exec at Stitch Fix, who has joined Pinterest in an expanded role.

Image source: Getty Images.

Pinterest joins Amazon as a direct Stitch Fix competitor

On June 10, Pinterest closed on its acquisition of The Yes, an artificial-intelligence powered fashion platform that gives shoppers a personalized feed based on their input on brands and styles. The financial terms of this deal, which was announced on June 2, weren’t disclosed.

The Yes was co-founded and is run by Stitch Fix’s former chief operating officer, Julie Bornstein, as I wrote in a June 2020 article outlining a bear thesis for Stitch Fix stock. In that article, I opined that The Yes had a better business model:

[M]y hunch is that The Yes’ business model could appeal to a wider number of consumers than Stitch Fix’s, particularly women. … The Yes isn’t sending items to consumers that they didn’t select themselves. Its service doesn’t have any fees.

Unlike Stitch Fix, The Yes isn’t carrying inventory. It’s drop-shipping to customers directly from the warehouses of the brands it carries. So it won’t have money tied up in inventory and should be able to react faster than Stitch Fix to changes in consumer demand.

This deal is a negative for Stitch Fix, as it means that a competing service will gain financial and technical resources and be introduced to a large number of new consumers.

Pinterest has tapped Bornstein to “lead shopping vision and strategy’ across the company.

The Yes isn’t Stitch Fix’s only competition or even its most noteworthy. “Amazon launched its Personal Shopper by Prime Wardrobe service in late July 2019. The service is exclusively for Prime members,” as I wrote in that same June 2020 article. At that time, the service was only available for women’s fashions in the United States. In September 2020, Amazon expanded this service to include men’s fashions.

Beware of bottom-fishing

Most investors should not bottom-fish Stitch Fix stock. Sure, it’s possible that management could turn things around. (For the record, I don’t think the current CEO is at fault for the company’s struggles; she was handed the reins of a company with a flawed business model.) But the chances of that happening seem low.

So, what stocks do look attractive?

Let’s end on a positive note.

Two dividend stocks that you should be able to buy and hold for the long term are American Water Works and NextEra Energy. Unlike the latest fashions, potable water and electricity will never go out of style.

But make sure to dollar-cost average (invest the same dollar amount at some set interval, such as quarterly) your way into your full position, rather than invest your entire sum all at once. Doing so will prevent you from buying all your shares right before a significant market drop. Given the current market dynamics and potential for a recession, dollar-cost averaging is particularly important now.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Lululemon Athletica, NextEra Energy, Pinterest, and Stitch Fix. The Motley Fool has a disclosure policy.

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