Is Stitch Fix the Future of Retail? The Jury Is Still Out
Company press kit
Stitch Fix missed across the board when it delivered its quarterly earnings report on June 8. The data-driven personal styling company generated net revenue of $371.7 million, a drop of 9.1% from last year, even as the pandemic accelerated consumer adoption of online shopping.
Capacity issues: Stitch Fix suffered greatly from fulfillment challenges related to COVID-19, which forced the company to shut down 3 out of 6 U.S. warehouses. By the end of March, Stitch Fix’s U.S. capacity cratered by nearly 70%. If it weren’t for fulfillment constraints, management says the company would have delivered positive year-over-year net revenue growth in Q3’20.
Suppressed user growth: To prevent adding new users amid supply constraints, Stitch Fix slashed its marketing spend by 25% compared to a year earlier. Active clients fell by 47,000 vs. the previous quarter, bringing the total user base to 3.4 million.
Core user loyalty: While the active client base dropped, Stifel analyst Scott Devitt notes that “Fix orders remained resilient during the pandemic, with auto-ship retention reaching the highest levels in over three years in late April as the company’s core clients continued to engage with the platform.”
The Netflix playbook: Similar to how Netflix recommends to viewers which movie to watch, and how Spotify curates custom music playlists for its users, Stitch Fix uses both proprietary algorithms and personal stylists to help users discover and buy apparel, shoes, and accessories.
Direct Buy platform: This offering allows consumers to shop and choose products based on “hyper-personalized recommendations” directly from the Stitch Fix website or mobile app. Stitch Fix intends for this to be a key driver for new client acquisition. Direct Buy, which was initially only available to existing clients, is experiencing significant growth since it was opened up to people who have not yet made a purchase. While it tripled quarter-over-quarter, Piper Sandler analyst Erinn Murphy cautions that the model “moves SFIX closer to the heavy promotional fray of challenged B&M retailers (e.g. department stores) and Ecom pureplays (Amazon, Zalando).”
Looking ahead: Stitch Fix’s growth relies on its ability to carry out its core strategy and new initiatives. RBC internet analyst Mark Mahaney said in a recent note that “if the company executes well and ramps its category expansion, it could get to 5MM users over the next three years.” Mahaney emphasized successful penetration of recent verticals including Men’s and Luxe, as well as expansion into new verticals such as Kids, as key catalysts. The analyst also acknowledged competition from traditional retailers and eCommerce companies such as Amazon as a top risk.
