Just as the COVID-19 sell-off was about to crush the markets, Stitch Fix (NASDAQ:SFIX) delivered a lower-than-expected outlook after earnings results on March 9. The double blow of weak guidance and the coronavirus pandemic was too much for short-term stock traders to handle, sending the shares tumbling. 

However, the stock looks like a steal right now for those with a long-term mindset. The company's total market cap is currently around $1.55 billion. That looks extremely low compared to the enormous opportunity in the $1.5 trillion global apparel industry. 

During the fiscal second-quarter conference call, founder and CEO Katrina Lake offered an update on three initiatives that show the company is still on offense. Here's what she had to say.

A woman opens a box of clothes from Stitch Fix.

Image source: Stitch Fix.

1. The core women's business is growing and profitable

Stitch Fix reported solid numbers, consistent with its recent growth trajectory. Revenue in the last quarter was up 22% year over year, and the company reported a small profit of $11.4 million, even as management continues to invest heavily in marketing to support growth. 

Women's is still the largest driver of growth. Stitch Fix saw its active clients increase 17% year over year to reach 3.5 million. It's clear that the company's ability to save clients time in finding the right outfit is continuing to drive more people to try the service.

During the call, Lake said, "Not only do we serve millions of active clients in [women's], we've also delivered year-over-year growth in both women's active clients and revenue every quarter on record." 

Most importantly, Stitch Fix is not relying on adding new clients to drive revenue growth. Revenue per active client has increased for seven consecutive quarters, as Lake highlighted. 

And that incremental revenue is driving better profitability. "We've seen U.S. women's gross margins in our first two quarters of [fiscal] 2020 surpass our 45% to 46% long-term target, which helps us to consistently deliver positive cash flows," Lake said.

2. Opportunity to grow men's category

Cash flow from the women's category is helping fund investments in men's, which is still in the early stages of growth. 

Stitch Fix has increased its distribution centers for men from two to four. This helped the company improve its shipping cost structure in fiscal 2019. Specifically, Lake said the new distribution centers provided "more than 300 basis points of shipping leverage" last year. This suggests that with more growth in men's, Stitch Fix could see an improvement in profitability as the business scales.

It's the ability of Stitch Fix to expand, add more clients, and improve its margins that is potentially causing investors to dramatically undervalue the stock right now.

"Altogether, our strategy has resulted in men's revenue quadrupling and gross margins increasing by more than 1,500 basis points from fiscal 2017 to fiscal 2019. And we believe there is still room for additional scale," Lake explained. 

Lake also said that gross margin should remain stable in fiscal 2020, allowing the company to fund its investments to expand into kid's, the U.K., and plus sizes, which Lake said is a $20 billion addressable market. 

3. More opportunities to leverage data to grow sales

At the heart of the service is data science. Stitch Fix wants to get to know its customers really well, going down to specific measurements of pants and shirts for each customer. That way the stylists know not only what you like and dislike, but they also can send clothes that fit, limiting the need for costly returns.

A crucial piece of this strategy is Style Shuffle. With this tool, clients can rate clothing recommendations, which dramatically improves accuracy for each Fix. The company has collected over 4 billion ratings, and over 80% of active clients have provided detailed feedback, which is huge as the company attempts to leverage its data to offer personalized recommendations in its direct-buy offerings such as Shop Your Looks.

What's more, Lake said, "We enhanced our algorithms to further diversify the looks we present to clients, resulting in increased conversion and items sold per client." 

During the beta test for Shop Your Looks last fall, management found that clients spent more money than clients without access. As those results show, these direct-buy initiatives could become a powerful tool to unlock valuable insights about its clients to grow the business over time.

Don't overlook this growth stock

Investors shouldn't get too caught up in the guidance. Revenue growth for fiscal 2020 still looks solid for the apparel company, expected to be in the range of 15% to 17% year over year on a 53-week comparable basis.

Stitch Fix is still finding plenty of opportunities to grow sales, attract new clients, and expand into other categories. This company is far from reaching a point of saturation.