Stitch Fix (SFIX) sells a range of apparel, shoes, and accessories through its website and mobile app with an emphasis on customizing style and fit to each individual.

The business model of creating subscription services, which delivers everything from meals to plants to clothing, went from hot to not over the past few years as companies such as Blue Apron (APRN) found profitability to be elusive due to high customer acquisition costs and churn rates.

For starters, separating Stick Fix (SFIX)  from other online ‘box’ services is the fact it has been posting a profit each quarter since it went public two years ago.

In the latest quarter reported Octr 2, the company had revenue of $432 million, a 35% increase, and active clients grew 18% from a year earlier to 3.2 million.

But guidance for the fiscal first quarter ending Nov 2 was light, as the company expects recent success with lower-priced items and less spending on marketing to drag on revenue in the early part of the fiscal year and investors punished a stock that had already lost some 55% of its value over the prior 52-weeks.

Following the report, shares sank an additional 10% to a new 52-week low before mounting a recovery in recent days.

I think the stock is still a bargain and bears, a whopping 32% of the shares are sold short, are dead wrong and will be running for cover and licking their wounds in the coming months.

A key difference between Stitch Fix and other apparel companies is SFIX is approaching its business like a software company: analyzing cohorts, becoming smarter over time about how to acquire, retain, and monetize.

While investing in data science personnel and increasing its advertising expenses, SFIX has remained profitable for the past five years.

The company has improved its CRM strategy for a decade and has a clear first-mover advantage, thanks to its narrow industry focus.

Stitch Fix continues growing its revenue in a way not matched by any companies in the apparel industry, not even by best-of-breed Lululemon (LULU).

As you can see, revenue is growth is accelerating at a rapid rate:

The market opportunity isn’t petite: Stitch Fix pegs its addressable market in the U.S. and U.K. at $431 billion. Still, competition is intensifying, particularly from the likes of Amazon (AMZN)  which has launched a try-before-you-buy Prime Wardrobe platform thru a service called Personal Shopper in late July for women. The list of other competing services includes Trunk Club and plus-size Dia & Co, among others.

I view the competition as confirmation that the direct to consumer, and customized clothing not a fad but will increasingly be a way that people replenish and freshen their wardrobe.

The stock’s recent drop-off offered “one of the best risk/reward opportunities” in small-to-mid-cap internet.

SFIX shares were trading at $21.75 per share on Wednesday afternoon, up $0.90 (+4.32%). Year-to-date, SFIX has gained 27.27%, versus a 20.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

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