I don't enjoy shopping for clothes. Finding clothes in a retail store takes too much time, and I might not even end up bringing home something I really like. The seemingly endless choices online aren't much better, especially with no guarantee the item in my virtual shopping cart fits well once it arrives. I can't imagine I'm the only one with these frustrations, especially with an incredible $342 billion spent on apparel and footwear in the U.S. annually.

This market is ripe for disruption, and Stitch Fix (NASDAQ:SFIX) is at the forefront of changing how people shop for clothes. With 29% revenue growth in its most recent earnings report, this seven year-old company, public only since last November, is attracting growing levels of investor interest. Find out how the intersection of fashion and data has become the company's secret weapon in the battle over the consumer wallet.

A Stitch Fix box of five menswear items: shoes, belt, jacket, shirt, and pants

An example of a "Fix" for men. Image source: Stitch Fix.

How it works

CEO Katrina Lake started the company with the idea that technology and data could help solve an age-old problem:

[H]ow do I find jeans that fit me? Or how do I find a dress to wear to a wedding? These are problems that are largely untouched by technology ... I felt like there is a different approach that needed to be taken to make apparel better for customers to be able to use all the advances we've had, in particular, data to be able to understand products and people better.

Over 2.7 million people have discovered the platform and use it to fill their closets. Customers start by sharing some personal data in a quick survey and paying a $20 styling fee. Those survey responses are matched with a treasure trove of data on the items in the company's inventory, and with the help of a personal stylist, a "Fix" of five items is shipped to the customer.

In the privacy of their homes, clients decide what items they want to keep and return the rest. The $20 styling fee becomes a credit toward any purchased items. Feedback on the five items is added to customers' profiles to improve the curation of items in the next order.

Being smart and getting smarter

By collecting data on the things that matter, Stitch Fix is optimizing its selection of merchandise, creating better engagement with customers, and honing its matching algorithms. When the company buys its inventory, it does so with loads of information from its customers.

Lake explained at a recent investor conference that "we actually know with a high degree of certainty what the needs are at both the size and inseam as we're buying." This detailed insight enables the company to reduce the risk of inventory going unsold -- a common problem for clothing retailers.

Three pictures with numerous data measurement points on each. The first picture is a casually dressed man titled Client Data. The second is a shirt titled Merchandise Data. The third is a sweater titled Feedback Data.

Image source: Stitch Fix June 2018 investor presentation (PDF download).

The company is also collecting feedback outside of the ordering process to engage customers and further improve its matching algorithms. On the most recent earnings call, chief operating office Mike Smith explained that "we began testing an interactive, mobile and web-based game with clients that we call Style Shuffle." This game provides numerous merchandise choices to customers which get rated "with a thumbs up or thumbs down." These preferences are added to a customer's profile, making the selection engine even smarter. The early results of Style Shuffle have been positive, with Smith reporting "higher client engagement and satisfaction among the clients who use this game."

This value of this data collection bears out in an important metric: the number of items purchased per Fix, which has been growing every year from the 2014 baseline:

  • 2015: 9%
  • 2016: 12%
  • 2017: 22%

Results

Having a high success rate with each order boosts revenue per client, which helps gross margin and revenue growth without the additional costs that come with attracting new customers.

Metric

Q1 2018

Q2 2018

Q3 2018

Revenue

$295.6 million

$295.9 million

$316.7 million

Year-over-year growth

25.2%

24.4%

29.2%

Active clients

2.4 million

2.5 million

2.7 million

Year-over-year growth

29.7%

30.6%

29.6%

Data source: Stitch Fix earnings reports.

While revenue growth has fluctuated between 24% and 29%, customer counts are consistently up about 30%. Lake explained the gap between these numbers last month: as Stitch Fix expands into new categories, such as menswear and its newly announced children's segment, the revenue per client lower. Historically, men spend around 80% of what women do.

The company is working to counter this trend with programs such as Style Pass and Extras, both announced last quarter. Style Pass allows unlimited Fixes with an annual $49 fee. The Extras feature allows clients to buy socks or undergarments in an e-commerce experience without paying styling fees. After only one quarter, Lake was positive about the results from both programs, indicating that Stitch Fix will "be able to see greater retention, greater engagement -- those will all be reflected in wallet share ..."

This data-driven approach is even paying off as the company grows into new segments. Lake indicated that within a year of the launch into women's plus sizes, the "the number of items Plus clients purchase per Fix has already reached parity with what was historically seen in our Women's offering."

Having data on the things that matter will be Stitch Fix's greatest asset as it captures market share in this notoriously competitive industry. From increased customer engagement to more efficient operations and a wider target market, data lies at the center of all these efforts. So the next time I feel the need to do any clothes shopping, Stitch Fix might help me avoid that dreaded trip to the mall.

Brian Withers owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.