Stitch Fix (NASDAQ:SFIX) shares dipped after its recent earnings report, but the company still seems to have a promising growth path ahead of it as it is riding two key trends in retail: e-commerce and personalization. The online styling service sends customers five items at a time, according to their size and tastes, and customers keep (and pay for) what they want and send the rest back.
In a previous article, I argued that Stitch Fix shares much in common with Netflix (NASDAQ: NFLX), as both disruptive companies use data gleaned from customer preferences to make products suited to the consumer's tastes. Netflix does it with movies and TV, and Stitch Fix does it with clothes. For Netflix, that model has been a key source of its success. It's too early to say the same for Stitch Fix, as the company has a number of subscription-box competitors, but so far it seems to be building an advantage.
Recent research by Second Measure highlighted potential opportunities for Stitch Fix. Interestingly, Second Measure found that rather than taking sales from its brick-and-mortar rivals, Stitch Fix instead grew the fashion-spending pie for all sellers and led to a slight uptick in spending among its new customers at brick-and-mortar chains. In particular, Second Measure found that sales spiked at Nordstrom (NYSE: JWN) and Hudson's Bay, which owns Lord & Taylor and Saks Fifth Avenue, and speculated that those sales went to off-price chains like Nordstrom Rack and Saks Off 5th.
Stitch Fix recently introduced Extras to keep sales of essentials like underwear and socks within its purview, and in much the same way, the company can also make changes to grab some of those sales that are going to Nordstrom and Hudson's Bay. Here are three suggestions:
1. Highlight price-matching
Stitch Fix has struggled with price perception in the past and needs to make sure customers feel like they're getting a fair price and not spending more than they want to.
In 2014, the company experienced a minor scandal when a blogger received a pair of Stitch Fix shorts priced at $68 with a $24.95 price tag from Nordstrom Rack, discounted from the regular $68. Stitch Fix management explained the mix-up by saying that the clothes were shipped by the supplier and that that pair slipped past quality control and was originally intended for Nordstrom Rack instead of Stitch Fix. The company does not buy clothes from Nordstrom Rack and mark them up, it said.
Still, the story underscored a related problem for Stitch Fix -- complaints about its merchandise being too expensive. The company recently took a step to remedy this by offering more lower-priced merchandise. It also promises to price-match, but I suspect many of its customers aren't aware of that. It could help prevent sending its customers to rivals for lower prices by making that price-matching offer clearer.
Otherwise, Stitch Fix may continue to be a victim of the "showrooming effect" of people trying on clothes from it, but buying elsewhere.
2. Allow for reorders
In addition to customers looking for lower-priced items, another reason for the jump in sales at Nordstrom and Hudson's Bay could be customers buying more of a Stitch Fix item that they like. Nordstrom, for instance, carries many of the same labels as Stitch Fix, so the Stitch Fix customer may be going to Nordstrom or shopping its online sites to find styles similar to something they liked from Stitch Fix.
Currently, there's no way to order anything directly from Stitch Fix with the exception of Extras, which can only be added onto regular orders. While the curated styling service is what makes Stitch Fix unique, the business would benefit by allowing customers to order some items directly. An easy way to start would be to allow customers to reorder items they loved in different colors or similar styles. On its website, Stitch Fix could have a feature like, "Since you loved that, try this," which would likely delight shoppers who would otherwise have to go to competitor websites to find more of what they liked.
With Stitch Fix's algorithms and data, it should be simple enough for the company to put together such an ordering tool.
3. Consider eventually adding brick-and-mortar stores
Plenty of brands were born online and successfully transitioned to the brick-and-mortar world. Bonobos, Warby Parker, and even Amazon have all successfully added physical stores to complement their digital presence, as more companies are discovering the strength of the omnichannel. Founded in 2011, Stitch Fix is still a young company, and I wouldn't expect it to open stores so soon after its IPO, as it's still building out its online model. But eventually, opening stores might make sense.
Other digitally native businesses have found that opening stores allows them to reach a demographic that is more reluctant to shop online, and the stores drive brand awareness as they and the experience they provide are their own form of advertising. While Amazon is the dominant online retailer, it's also used physical formats to sell gadgets, curate a unique bookstore experience, and now to sell groceries.
Stitch Fix could use its own stores to serve a wide range of strategic goals. The company could follow the lead of Nordstrom Local and open a store to cultivate a high-end customer with a unique, personalized experience. Or it could use its stores to showcase its exclusive brands, which help separate the company from its competition. Having stores would allow customers to get its clothes faster than they do online, and help prevent Stitch Fix from losing sales to other brick-and-mortar stores.
Adding stores would be a bold move, but it would be an easy way to boost sales and increase customer awareness.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Netflix and Stitch Fix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.