Stitch Fix surges after earnings beat, FedEx’s warning, Adobe growth slows

Yahoo Finance's Brian Sozzi and Emily McCormick break down the latest earnings from Stitch Fix, FedEx, and Adobe.

Video transcript

BRIAN SOZZI: Well, first, we want to kick off our show this morning with a look at some of the biggest names making moves after reporting earnings results over the past 24 hours or so. Brian, of course, one stock that has been trending on Yahoo Finance, one that we've been watching closely, has been Stitch Fix. Now, this is the online personal styling company. One of the big gainers this morning after reporting earnings yesterday.

And one of the things that really struck me about Stitch Fix's results-- of course, they were better than expected on both the top and bottom line. We saw the company swing to a profit on an adjusted basis, really posting some gains here compared to the losses that they saw last year. Seeing active customers up 18% year over year to 4.2 million. So really a strong quarter here, Brian, when we think about Stitch Fix and this company being one of the beneficiaries of this pandemic-driven shift to e-commerce.

BRIAN SOZZI: Right, Emily. And it's just good to start the morning and talk about some individual stocks on a day-- certainly we have news from the Fed. We have the Evergrande crisis continuing. But here, you have one company trying to buck that trend. As you mentioned, that is Stitch Fix here, headed by new CEO Elizabeth Spalding, who will be appearing at our All Market Summit Conference next month. And she will likely have some good things to talk about coming off of this quarter here.

Net profits really blew away estimates. Adjusted operating profits blew away estimates. Net revenue per active client-- over $500. That was up 4% year over year. And I did like, Emily, their tone on the earnings call. It's not something you can necessarily measure per se. You listen to enough earnings calls, you do get a sense of how a company is doing and how they view themselves moving forward. I liked what they had to say on this earnings call. Also liked-- we'll hear about this from Nike when they report their earnings later this week-- another retailer calling out supply chain. Really, that is one of the biggest problems facing retailers. Of course, we'll talk more about FedEx having their own problems in their own supply chain. But can they get goods from overseas markets in such a tight market?

Now, Stitch Fix is telling you, yes, they do not source a lot of goods coming from Vietnam. And as we know, Vietnam has been dealing with the COVID spikes of their own and a closed-down economy. That looks to be starting to loosen up. But Stitch Fix saying here, Emily, they don't get a lot of material or goods from there. That is good. And their sales are trending in the right direction, in large part because people are buying wear--to-work ensemble. Whether they are upgrading their apparel that they've been wearing in front of Zoom meetings for the past year, whatever it is, they're going on Stitch Fix and buying it.

EMILY MCCORMICK: Absolutely, Brian. And I think the point that you made about the supply chain challenges here for retailers is really key for a lot of investors to be watching. And one thing I want to highlight about this stock move-- again, we are seeing these shares up nearly 12% in the pre-market session. We do have to keep in mind that the stock is down about 40% so far for the year to date through yesterday's close, so there was a lot of pessimism that had been built into this. Of course, the stock had more than doubled if we think about its yearly performance in 2020. So this really has been one of those pandemic-era stay-in-place beneficiaries in terms of how investors have been playing this stock.

But one other update here from Stitch Fix. The company launching a new service called Stitch Fix Freestyle. That essentially allows customers to buy items from the platform without necessarily having to go through that subscription Fix service, as they call it. And a lot of Wall Street analysts seem to be pretty bullish on this as well. And Morgan Stanley even highlighted that the launch of Stitch Fix Freestyle came a little bit later than expected but was one of those central tenets to the bull's thesis. But of course, one stock we're watching closely.

Another stock that we are always watching closely as a bellwether of transportation and of shipping is FedEx. And this company also reported earnings results yesterday after the close. Different story here for FedEx. We are seeing those shares moving sharply lower in the pre-market after missing its quarterly earnings estimates. And Brian, just taking a look here at these operating results, I mean, adjusted earnings coming in below expectations. Adjusted operating margin coming in at 6.8% versus 8.5% expected. Seeing a ton of profit margin pressure here when we think about the supply chain shortages and labor scarcities.

BRIAN SOZZI: This is a disturbing report out of FedEx. And of course, Emily, this is putting pressure on shares of UPS in the pre-market. I imagine this report, the warning, the magnitude of the warning from FedEx, will put pressure on the railroads, the trucking sectors in large part because of what they said on the conference call about how they're handling staffing shortages. They just can't get enough human beings to go into their sortation facilities and deliver packages.

A couple of things worth mentioning here that caught my attention from the call, Emily. They have a Portland, Oregon hub they say that is running at 65% of the capacity that they ultimately-- in other words, they can't get the staffing to drive their facilities at full capacity and deliver packages to customer homes. And that is having a major blowback across the network. FedEx noting there are more than 600,000 packages a day being rerouted because of staffing shortages at their various facilities.

That is alarming, especially in front of the holiday shopping season. And also, secondarily, Emily, I think it gives a great real-time snapshot into the September employment report that is only a few weeks away here. These staffing shortages at FedEx, at UPS, at truckers, at railroads, at retailers, this continues, and I would argue is, in fact, even getting worse. I think what FedEx had to say here is very disturbing.

Now, we did get a good note, an interesting note by KeyBank on FedEx. Now, they are out here reiterating their buy rating on the stock. That is Todd C. Fowler reiterating his overweight on the stock. I will push back on one thing he mentioned here. He is noting that the fundamental earnings power of FedEx business hasn't changed, and that is a large part of the reason why he's staying bullish. I would argue it is changing. The cost of doing business for FedEx in this type of environment is going up dramatically, and that is not going to change over the next few years. Hence, you see FedEx pushing through some very aggressive price increases this week.

EMILY MCCORMICK: Well, that's right, Brian. And those price increases were actually one point that I wanted to make because, of course, this came in an announcement before their latest quarterly earnings results. But we're seeing FedEx announcing its shipping rates for FedEx Express, ground, and freight all going up by an average of 5.9% starting January 3. That's the biggest increase that we've seen in about a decade here for FedEx. So really goes to show that this company needs to pass on some of these costs to its customers here, both in terms of its ground shipments and in terms of the people who are actually making a lot of these e-commerce deliveries.

And when we think about how this has actually impacted FedEx in its latest quarter, they actually gave a quantitative number here. They said that operating results were negatively affected by an estimated $450 million year over year due, again, to that constrained labor market, which impacted their labor availability and resulted in all of these different network inefficiencies. So FedEx, of course, being a major bellwether here, and like you said, Brian, really shining a red light here when it comes to this industry.

Now, finally, one other earnings result-- go ahead, Brian.

BRIAN SOZZI: Yeah, real quick final note on FedEx, Emily. They also noted-- I'd watch shares of Amazon today as well. FedEx noting on their call that they are seeing a slowdown in e-commerce shopping as more people go back to physical stores. Very interesting note. Not seeing a lot of folks talk about it this morning. Hence, I am bringing it up to you. Also, they're going to a great length describing why they're having a labor shortage in this environment. Of course, in addition to everybody competing for workers, they're calling out childcare as a major issue for them trying to attain new workers, especially in an environment where kids are now going back to physically be in schools.

EMILY MCCORMICK: Right. And of course, whenever we talk to our labor market experts and economists, child care, and of course, concerns over contracting COVID-19, continue to be concerns here for the labor market, and it's keeping people on the sidelines. Of course, we did just have those federal enhanced unemployment benefits expiring at the national level on September 6 as well. So it really does remain to be seen here in the coming weeks and months whether we start to get more participation, more people coming in on the sidelines, and whether this impacts hiring trends that some of these major employers.

And then finally, do want to turn now to Adobe. This is another company that we saw post quarterly earnings results after market close yesterday. Those actually did talk consensus expectations but still not enough to really drive a move higher in the stock this morning. We are seeing it move to the downside. This has been one of these companies that has been outperforming the S&P 500 so far for the year to date, so could be a little bit of profit-taking here, a little bit of a case of perhaps expectations set too high heading into earnings results. But Brian, a little bit disappointing to see the stock move after a relatively strong earnings report.

BRIAN SOZZI: Yeah, this is another one of those work-from-home trades that worked great last year. And now the Street, I think, is realizing that growth will slow once you start lapping those strong numbers from last year. A couple of things worth calling out here, Emily. Adobe has seen slowing sales growth for about quarters in a row here now-- in this most recent quarter, 19% sales growth. Their operating margin has also trended lower over the past three quarters.

Now, still strong overall results, all things considered. It's just boiling down-- they, I think, are just having enough difficulty, like a Zoom, like many other players in this space, meeting these elevated Street expectations. And I know the Street is coming out trying to defend Adobe shares this morning. But I think why you're seeing the stock down in the pre-market is, in fact, because of these slowing growth rates and the company's call-out of continued volatile conditions to kick off this quarter.

EMILY MCCORMICK: That's right, Brian. And I think just highlighting one note here from Jefferies analyst Brent Thill saying in a note this morning, quote, "it appears we in the buy side had been spoiled by last quarter's broad strength and had overly discounted the seasonality comments in setting our expectations." Management stated that the quarter played out as they expected. And so again, I think it really goes to show here a high bar set for Adobe. Didn't clear quite those highest expectations on Wall Street in these latest results, but it does look like those expectations are getting reset and priced into the stock now.