Stitch Fix, Inc. (NASDAQ:SFIX) shares have had a horrible month, losing 28% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 67%, which is great even in a bull market.

In spite of the heavy fall in price, there still wouldn't be many who think Stitch Fix's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in the United States' Specialty Retail industry is similar at about 0.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Stitch Fix's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Stitch Fix's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Revenue Growth Forecasted For Stitch Fix?

In order to justify its P/S ratio, Stitch Fix would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 42% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 4.3% during the coming year according to the six analysts following the company. With the industry predicted to deliver 4.7% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Stitch Fix's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Key Takeaway

Following Stitch Fix's share price tumble, its P/S is just clinging on to the industry median P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

While Stitch Fix's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Stitch Fix, and understanding should be part of your investment process.

If you're unsure about the strength of Stitch Fix's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.