Stitch Fix (SFIX 1.80%) makes its money by selling customers a "fix," a box of curated clothing items sent to them after they take a style quiz. The customer then chooses the items she or he wants to buy and sends back the others. It's a successful model so far, with Stitch Fix beating analysts' earnings expectations for the past four quarters. Some observers have been concerned, though, that customers might tire of the "fix" concept and move on.
But Stitch Fix has something else up its sleeve. The company has been beta-testing a direct-buy option, and Retail Dive recently reported the option, called "Shop Your Looks," has moved out of testing and is now available to more customers. Shop Your Looks may become a big revenue driver for the company; it gives customers more control, yet still offers the personalization they love.
A booming market
With the company's original fix, customers can order one at will or set up automatic deliveries. Initially, receiving a box of surprise items tailored to one's style can translate into excitement and purchases. And the market is booming. According to a report by McKinsey & Co., 15% of online shoppers have signed up for one or more services to receive products on a regular basis. And the research showed the market grew at an annualized rate of more than 100% over the five years to 2018.
But it's clear there are risks related to relying on one main option. Whether a customer loses interest and decides to move on to the next novelty or simply forgets to set up deliveries, Stitch Fix may eventually find itself running out of steam. Shop Your Looks is a great way to nip any such possibilities in the bud. Here's how it works: When Stitch Fix customers visit the website, the company's algorithms work to present them with a handful of items that match their style.
For customers, this direct-buy option allows them to participate more actively in the shopping experience, and buy whenever they want rather than having to wait for the arrival of a fix. For Stitch Fix, it means capturing spending that it lost out on before. In its most recent letter to shareholders, the company said shoes, handbags, and accessories -- sometimes seen as impulse buys -- have represented less than 10% of fix revenue, but in the first quarter of fiscal 2020, these items accounted for more than 20% of Shop Your Looks revenue. Shop Your Looks has opened the door to unplanned and last-minute purchases.
Shop Your Looks also is a boon for inventory management. It allows the company to promote its current inventory to customers who might be a good match, decreasing its chances of being stuck with a backlog of items. Instead, Stitch Fix can keep the stock flowing and replenish it with new styles accordingly. The company said it has experienced low return rates with Shop Your Looks, and about 60% of customers have purchased two items or more.
And finally, this extra push into personalization is exactly how Stitch Fix can build customer loyalty and therefore reduce churn, or loss of users. McKinsey & Co. research showed that customers expect such services to increase their levels of personalization over time, and often decide to stick with a service based on the personalization factor.
The next logical step
Stitch Fix is growing, with a 17% year-over-year increase in active clients in the fiscal first quarter, and a 21% increase in net revenue. Shop Your Looks is the next logical step for Stitch Fix as it builds on that growth, instead of waiting for a slowdown and then taking action. This strategy should please investors. And Shop Your Looks, now complementary to the fix, has the potential to become a major revenue driver, allowing customers to broaden their Stitch Fix shopping experience.
As for the shares, Wall Street predicts 15% upside from here. Though a valuation of 103 times earnings is steep, it's just a third of the peak reached almost two years ago.
Considering the growth in active clients and revenue as well as the company's efforts to deepen its personalization offer, Stitch Fix seems on its way to offering customers -- and investors -- the complete package.