The fiscal third-quarter earnings report might look like a lost quarter for Stitch Fix (NASDAQ:SFIX), but there were glimmers of a business that is gaining massive strength in the apparel industry. The momentum of the direct buy offering is a good example.

Direct buy was introduced last year and allows existing clients to purchase items directly from Stitch Fix based on highly personalized recommendations. This is different than Stitch Fix's core service, where clients are shipped a box of items that are selected by a stylist based on the client's preferences and feedback.

While total revenue fell 9% year over year in the last quarter, the direct-buy service showed no signs of slowing down and outperformed management's pre-COVID expectations from February all the way through April, even as Stitch Fix shut down three of its warehouse facilities during March. 

Management sees several ways direct buy will benefit the company's performance and has plans to expand the service to new clients, which could reaccelerate Stitch Fix's revenue growth. Here's what you need to know about direct buy.

A woman holding a box with Stitch Fix written on it.

Image source: Stitch Fix.

Direct buy is growing rapidly

One thing to know about Stitch Fix is that clients are not obligated to receive a regular shipment like a subscription service, but most clients still choose to receive a recurring Fix with auto-ship.Of course, many consumers like to shop for individual items and don't want a new box of clothes every month. All said, Stitch Fix is limiting its addressable market with its core service, but direct buy could greatly expand its market potential to capture more apparel spending shifting online. 

As CEO Katrina Lake described during the conference call, direct buy's "low commitment and low friction path to a personalized shopping experience represents an important gateway to Stitch Fix." 

Since launching to all active clients last quarter, the service has taken off. Stitch Fix saw robust engagement with direct buy during the fiscal third quarter ending May 2. Its penetration grew from 5% of women's clients to 13%. What's more, revenue from direct buy more than tripled quarter over quarter. 

Direct buy could accelerate active client growth

So far, direct buy has only been available to active clients who have purchased something in the past. Recently, Stitch Fix launched a new offering in beta, "Trending for You." This new feature removes the purchase requirement to use direct buy, so now new clients who have just completed their profiles can immediately begin buying recommended items.

Stitch Fix has also partnered with fashion influencer Katie Sturino to offer new and existing clients the ability to purchase curated outfits based on each client's profile or past purchase history. 

These are two examples of how Stitch Fix is continuing to improve the experience and transitioning to an online apparel store that serves a broad range of needs.

The most important thing about the Trending for You feature is that management believes it can improve conversion rates among prospective clients who have been on the fence. Stitch Fix has seen many prospective clients go through the steps to set up a profile, providing several details relating to fit and style preferences, only to abandon the final step of scheduling a Fix.

The new features offered with direct buy could fix that problem. "[...]We believe the high probability clients as well as dormant clients who received past fixes offer exciting conversion and reengagement opportunities through direct buy, and we plan to begin more aggressively targeting both groups in the months ahead," President Elizabeth Spaulding explained. 

Stitch Fix is playing offense

Given the momentum already happening with direct buy, Stitch Fix has a big opportunity to raise conversion of prospective clients with Trending for You, which could help Stitch Fix reaccelerate its revenue growth, perhaps faster than investors expect. Stitch Fix is not providing guidance, but management expects to return to revenue growth in the fiscal fourth quarter ending in July. 

"While our store-based competitors retrench in the face of negative comp sales and store closings and pulled back their capital investments, we are leaning in and investing in new capabilities like direct buy and automation that position us to take greater share in our near future," Lake said. 

Note that Lake isn't talking about a long-term goal, she is talking about getting a jump on the competition now. Investors will want to keep their eye on this growth stock, as Stitch Fix is not even close to hitting its full stride yet.