Stitch Fix ( SFIX -5.50% ) entered 2020 having grown revenue by just 8.5% in 2019. But a combination of improvements to its recommendation engine and a wider selection of items helped boost revenue growth back to double-digit rates in the fiscal first quarter ending in October.
What's more, management sees revenue growth continuing to accelerate over the next year. The latest earnings results caused the stock to rocket higher, but this is just the start of Stitch Fix's mission to capture more share of the apparel industry.
Customers are ready for their fix
Stitch Fix initially experienced disruption to its distribution centers and a deceleration in new signups at the beginning of the pandemic. These challenges caused revenue to plunge 9.1% year over year in the fiscal third quarter of 2020. That performance represented a steep sequential deceleration from the previous quarter's 22% growth rate.
In a year where e-commerce has come into the spotlight, this was the time to shine for the online styling service, but adjustments needed to be made. Management de-emphasized clothing for the office in favor of clients' current needs for working from home, which involved expanding its selection of athleisure items.
Stitch Fix also made strides to improve its recommendation algorithms, given that the business hinges on data gathering and analytics to deliver the right fit and style that each client is looking for. These improvements contributed to the highest rate of successful first Fixes for clients in five years, with nearly 80% of new clients purchasing at least one item in their first Fix.
Active client growth is accelerating
The rate of successful first Fixes is a key metric that management watches, since it is a reliable indicator of repeat engagement with the service. It's one reason that management believes revenue growth will continue to accelerate through calendar 2021.
"In their very first experience with us, these recently acquired Fix customers are demonstrating both strong purchase behavior and satisfaction," CEO Katrina Lake said during the fiscal first-quarter conference call held on Dec. 7.
Active clients grew 10.2% year over year in the last quarter, reaching 3.8 million. That's a slight acceleration over the 8.8% growth in the previous quarter, but it's important because most new clients are choosing to receive shipments on a recurring schedule. That's a net gain of 240,000 new clients that should lead to healthy retention rates and repeat purchases in the near term.
New features should drive more growth
Stitch Fix has several new shopping features it's working on to increase client satisfaction and convert new signups.
The backbone of the company is the more than 5,600 stylists who are algorithmically matched with each client based on feedback and style preferences. The company uses data to power its direct buy service, a new offering that launched in 2019 that allows clients to purchase items outside of a regular Fix. It's proven very successful in driving higher engagement on the platform.
However, Stitch Fix has had a problem with new signups filling out their initial profile but not committing to a Fix. In a survey, nearly half of respondents told Stitch Fix they would convert if there was a way to preview what they might receive in their first shipment.
Stitch Fix recently tested a new service called Fix Preview in the U.K., which allows clients to be more involved in selecting their items. It led to higher customer satisfaction and higher average order value during its trial run, and now the company is looking to expand it.
Fix Preview could significantly accelerate active client growth, as Lake explained on the recent conference call:
We believe that Fix Preview, along with our ongoing momentum in direct buy, will allow us not only to attract high-quality clients, but also to convert our large prospect population that we estimate is in the millions, clients who are at the precipice but have not yet converted to Stitch Fix.
Lake's statement about potentially reeling in "millions" of prospective clients with Fix Preview is enough reason to be excited about the future.
Forward guidance blew away expectations
With many apparel stores still struggling, the company's hyper-personalized service and data-driven platform could lead to significant market share gains in the short term, which appears to already be happening based on the recent acceleration in revenue growth.
The company's current outlook calls for fiscal 2021 revenue to increase between 20% to 25% year over year. What's most impressive is that this guidance implies growth will accelerate to between 29% to 40% in the second half of the fiscal year.
While that's exciting news, Stitch Fix is just scratching the surface of its potential. The company expects to reach $2.1 billion in revenue in fiscal 2021 at the midpoint of the guidance range, but that's still extremely small compared to the hundreds of billions spent on apparel every year.
Just like that, Stitch Fix has emerged as one of the hottest growth stocks around, but the near-term outlook, continued innovation, and long-term market opportunity suggest this is just the beginning.