Investors aren't sure what to make of Stitch Fix (NASDAQ:SFIX) heading into its fiscal third-quarter earnings report on Wednesday, June 5. The personal styling service's stock price has fluctuated wildly since the start of the year, nearly doubling at one point before settling back down closer to the market's return. Shares trailed broader indexes in the past three months even though the e-commerce upstart trounced expectations in its latest earnings report.

That volatility implies investors are taking a "show-me" approach to Stitch Fix and waiting for concrete signs of CEO Katrina Lake's ability to win a defensible market position using a subscription-based sales model. The good news is there'll be plenty of opportunities to evaluate the company's progress along its key growth strategies in Wednesday's report. So, let's dive right in.

Happy clickers

For Stitch Fix to have a shot at achieving the level of global market share that management is targeting, it needs to wow its customers. Plenty of bigger and smaller competitors are marketing to these same clients. And switching to another service is just a matter of a few mouse clicks when you're dealing with purely digital retailers.

A woman kissing a laptop while holding it up.

Image source: Getty Images.

A few metrics that the company regularly releases indicate whether Stitch Fix is succeeding at this task, but Wall Street's favorite is the active client base. That figure jumped by 483,000 last quarter, or 18%, to push the customer list to 3 million .

But average spending is just as important, because it describes customers' propensity to keep the orders flowing. Higher annual spending is a strong sign that clients are valuing the service and are choosing to purchase more items from each shipment.

Average spending rose 6% last quarter to $463, marking Stitch Fix's third consecutive quarter of improvement. Another increase this week would show that the company's many data-backed upgrades around inventory, shipping, and stylist matching, are delivering higher guest satisfaction.

Effective marketing

Stitch Fix has a major challenge in communicating details about its service and the value that users can get from it. Many people aren't aware of the brand, and even if they are, shoppers often don't understand that the company sells a full men's selection and a growing inventory of kids brands.  

To help fix this issue, executives launched their biggest marketing campaign to date this past quarter, with ads hitting TV and digital media. Management said back in March that this spending would likely pinch earnings during the quarter but that the payoff would show up in faster growth over the coming quarters. Investors can judge the actual results by following revenue trends and whatever Stitch Fix reveals about its brand awareness, understanding, and affinity on Wednesday. Including the advertising boost, executives are predicting sales of between $388 million and $398 million for the fiscal third quarter.

Going global

The advertising spike will likely combine with expenses associated with the U.K. expansion to push Stitch Fix back into the red this quarter. Management says this will be just a temporary visit into the loss column, though, as adjusted earnings return to modestly positive territory in the fourth quarter. Stitch Fix even raised its full-year outlook to target earnings of between $33 million and $43 million, and investors might see another upgrade on Wednesday if operating trends continued to improve over the last few months.

Altogether, Lake and her team believe sales will rise by between 29% and 35% this year, compared to a 26% increase in 2018. That result includes essentially no impact from the U.K. launch that's set for Q4, but the global expansion effort should start lifting results in fiscal 2020.