There are a number of qualities that make Stitch Fix (SFIX 1.25%) unique.
The company sells clothes primarily through a curated styling service, selecting items for you instead of letting you do the choosing. It's also invested heavily in data science and algorithms to help its stylists choose clothes and to know what to buy from vendors. But what's often overlooked about the company is its pace of innovation.
When Stitch Fix IPO'ed three years ago, the company's business model was entirely based around its "Fixes," or the boxes of five items it ships to its customers, often at regular intervals. Since then, the company has introduced innovations like Direct Buy, allowing clients to choose clothes from a highly curated pool; Style Shuffle, a game that helps Stitch Fix learn more about clients' tastes, and Trending for You, a personalized recommendation feed.
That pattern of innovation was on display in the latest quarter as the company again raised the bar on what its platform is capable of. Let's take a look at two new features the company added in its fiscal 2021 first quarter.
Image source: Stitch Fix.
1. Fix Preview successfully tested in the U.K.
Traditionally, Stitch Fix customers have had little input into what comes in their fixes. Though the company collects detailed information on what their tastes, fits, and budgets are, what comes in the box is essentially a surprise.
Now, Stitch Fix is aiming to change that. The company has been testing a feature called Fix Preview in the U.K. Fix Preview gives clients a chance to view the items that they're supposed to receive before they are shipped, giving the client a chance to engage with a stylist and have more control over the items he or she gets. Stitch Fix chose to launch Fix preview and survey prospective clients, which are customers that have filled out a style profile but haven't ordered a Fix. The new feature found that 45% of respondents would order a Fix if they had the ability to preview what they were gaining.
Based on that insight, the company began testing the feature in August and has now made it available to half of its U.K. clientele. It's found that the feature has raised retention and customer satisfaction rates. The company plans to introduce Fix Preview to all of its U.K. clients and is now testing it in the U.S. Stitch Fix believes its prospective client population is in the millions, and any tools that help the company convert them to active customers will move the needle significantly for the business. Fix Preview could be a big step forward for the company.
2. Shop by Category provides users another option to buy
Building on the data captured from its Style Shuffle game, Stitch Fix has launched a new form of Direct Buy called Shop by Category, giving shoppers curated options in categories such as sweaters, athleisure, or seasonal. It's also another way for the company to collect data on tastes and preferences.
It's the latest example of the company adding new features to Direct Buy, which its sees as a major acquisition vehicle and possibly the best use of its data science capabilities. It plans to launch Direct Buy for new customers later this fiscal year, and its goal is to be able to offer new customers a highly curated selection based on data points from Style Shuffle and other information provided through the style profile. If such an offering works, it would be truly powerful and unlike anything currently available from any of its competitors.
As management explained in its shareholder letter, "Specifically, we believe this new category-based shopping experience will provide a compelling gateway for the cold start experience where we can provide relevant, personalized recommendations to clients as they enter Stitch Fix for the first time."
Stitch Fix is always innovating
With a wide range of product features and tools for engaging customers and collecting data, Stitch Fix is putting the building blocks in place for a highly differentiated shopping experience, and more experimentation is on the way. CEO Katrina Lake stressed a number of times on the earnings call that the company relies on A/B testing for many of its product decisions, giving it a significant advantage over companies that don't have anything close to Stitch Fix's technology foundation or its client data. The brick-and-mortar retailers that make up the majority of its competition don't have the kind of detailed customer profiles that Stitch Fix does, and most other online apparel sellers rely on search rather than the data-based curation that Stitch Fix uses.
This disruptive growth stock soared on its first-quarter earnings report, climbing 33% after hours, but the stock has been heavily shorted as a significant percentage of investors believe the stock is overvalued and the business model is unworkable.
Instead, the opposite seems to be true. Stitch Fix has returned to growth and just experienced record quarterly additions of active clients. Beyond its tech innovations, there are a number of tailwinds that could drive the stock higher over the coming years, including lapping its dismal results early in the pandemic, and pent-up demand when the pandemic ends. Meanwhile, as the new features above show, the company's moat continues to get wider.
