Stocks

Unusual Options Activity In Stitch Fix

Just like Netflix disrupted the at home movie streaming market, Stitch Fix is disrupting apparel retail by allow you to choose your own clothes from a selection of clothing. Stitch Fix is your own stylist on a budget. They send you five items at a time based on an interface through which you select your style preferences, budget, and fit. Customers only pay for what they want to keep and return the rest for a service fee of $20 which goes towards the purchase.

Similar to Netflix who uses technology to get to know their customers, Stitch Fix has put their spin on technology as well with an interactive, mobile and web-based game with clients that we call Style Shuffle.

Stitch Fix was launched in 2011. The company has seen significant growth since, with 2.7 million customers and more than $1 billion in revenue. The person running Stitch Fix is founder Katrina Lake and is the youngest woman ever to take a company public.

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Stitch Fix's debut on the stock exchange last November, with an opening price of $16.90. The stock more than double before settling back to the high $20s.  But since its existence the stock price has been more volatile than Elon Musk’s twits.

And Tuesday should be no different when they announce their fourth quarter earnings after the market close. According to The Motley Fool, the 3 things that investors should pay attention to are the following:

The biggest change Stitch Fix made in the fourth quarter was its May launch in the U.K., the company's first foray into a foreign country.  On the third-quarter earnings call, shortly after the U.K. launch, CEO Katrina Lake sounded optimistic about the launch, saying "it seems like there is a lot of excitement from the [British] market" for Stitch Fix's service. Look for commentary and updates on the U.K. business, as Stitch Fix's results there will likely inform the brand's ability to penetrate other international markets.

Despite the fact that Stitch Fix surged following its last two earnings reports, the stock is actually trading near all-time lows today. The most closely watched metric from the company has been revenue growth, the best indicator of the company's ability to truly change how people shop for clothes.  Pay attention to the mix of revenue growth between new and existing clients in the upcoming report.

The most influential number in the earnings report, however, will likely be the company's revenue guidance for fiscal 2020.  This time a year ago, management forecast adjusted EBITDA of $20 million to $40 million for 2019, and the company is now targeting the high end of that range for the full year. With the investments to kick off the U.K. market now in the past, we could see a jump in adjusted EBITDA for 2020.

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But the Smart Money is not having any of that.  On Monday they bought over 5,000 put options with a $14 strike price that expire on Friday. 

With price at $19, that represents a potential 26% decline in price, but if they are right, the trade would be worth up to 500% - 700% return.  And it would mean breach the weekly demand at $19 as well.

Will the Smart Money be right, we shall find out Tuesday?

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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