Stitch Fix Invades the U.K.

After capturing three million customers in the United States, Stitch Fix (SFIX -2.28%) is taking its personalized clothing shopping service to the U.K. This latest move is just one of the company's category expansions over the past few years:

Source: Stitch Fix press releases.

The company gave the U.K. program a running start by opening a customer waitlist last October when the service was initially announced. Now that the launch is here, let's find out why Stitch Fix is making a play for fashion in this overseas market.

Now launching in the U.K., Stitch Fix makes its first international expansion. Image source: Stitch Fix

Growth potential across the pond

Stitch Fix management has expressed enthusiasm about this expansion, noting the U.K. market's greater prevalence of online clothing shopping, reduced emphasis on discounts, and the appeal of personalized shopping experiences. While the U.K. is a smaller market than the United States, it is forecast to grow more than 10% annually until 2023.  

During an earnings call last October, Stitch Fix CEO Katrina Lake discussed how the company can stand out as it enters the region:

Based on consumer research and planning, we believe that our personalization capabilities will resonate with U.K. clients and that we can be a strong partner to international brands with whom we don't already work. Our engineering and data science capabilities will allow us to build a localized presence to effectively serve U.K. clients with the same highly personalized approach we've used in the U.S.

Of course, Stitch Fix is not the only online retailer pursuing U.K. shoppers. Perhaps Stitch Fix's biggest competitor in the online clothing category is Amazon and its Prime Wardrobe UK service, which launched in October 2018. Amazon Prime Wardrobe allows customers to select up to eight fashion items and "try before you buy," with fast shipping and free returns. The company is testing its own version of a human and artificial intelligence-supported styling service that would directly compete with Stitch Fix. While investors should keep an eye on Amazon's progress, Stitch Fix is the clear frontrunner in personalized shopping at this time. Both companies are so new to the U.K. market that each has the opportunity to make significant gains.

Investing for the future

An international launch isn't cheap. Stitch Fix has been investing this year to prepare for the new market entry; hiring talent for its merchandising, styling, and customer service teams; and setting up the warehouse that will serve U.K. customers. In its latest shareholder letter, management indicated approximately $12 million of selling, general, and administrative expenses would be dedicated to the U.K. expansion in the latter half of fiscal 2019.

As the U.K. service starts up, Stitch Fix management expects reduced profitability as it learns the market and invests in inventory to suit new customers. Even so, Stitch Fix's financials are strong. The company estimates 2019 net revenue to fall between $1.53 billion and $1.56 billion, a growth rate of 25% to 27% year over year. In March, Stitch Fix reported positive second-quarter results, with accelerating revenue growth and an 18% increase in new customers. The company managed to increase gross margin one percentage point year-over-year, though SG&A expenses did jump from 37.8% to 39.9% of net revenue, partially due to U.K.-related spending.

With four major service expansions in the past four years, Stitch Fix has developed significant pathways for future growth, and the company's U.K. launch could set the stage for entries into other global fashion markets. But gaining new ground takes time. Investors expecting a massive, near-term pop from a U.K. launch will be disappointed, as the company carefully manages its growth alongside customer demand and inventory availability, putting customer satisfaction first.

I believe that Stitch Fix is very intentionally planting the seeds of growth at home and abroad to bear long-term fruit over the next five to 10 years. As more clothing spending comes online and as Stitch Fix deepens its customer relationships, the company's U.K. expansion will contribute to steady, profitable growth for years to come.