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Stitch Fix Thinks Direct Buy Could Be a Game Changer

By Demitri Kalogeropoulos - Jun 16, 2021 at 10:30AM

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The e-commerce retailer has its eyes on a much bigger addressable market.

Stitch Fix (SFIX -3.50%) is back in Wall Street's good graces. Just a few months after the stock was pummeled following its second-quarter earnings release, shares shot higher this past week. The catalyst was management's boosting of the e-commerce specialist's outlook following accelerating sales growth.

In a conference call, incoming CEO Elizabeth Spaulding and her team explained why they have a brighter sales and profit forecast today than they did back in March. Let's look at the highlights from that presentation.

Person holding four boxes reaching out to press on a doorbell.

Image source: Getty Images.

More than a gimmick

"As client preferences began to shift in Q3, the rich insights we've collected around product and client preferences allowed us to match clients with the most-relevant and personalized items for them," Spaulding said.

Stitch Fix's growth accelerated for the second straight quarter, with customers increasing 20%, compared to 12% last quarter and 10% in the fiscal first quarter. That success allowed the company to outperform the downbeat forecast that management issued in early March. Instead of landing between $505 million and $515 million, sales were $535 million.

Executives apparently solved the shipping challenges that pinched growth last quarter. But the bigger factor was improving demand for apparel in general. Stitch Fix's flexible model allowed it to take advantage of that spike even as shoppers began demanding more stylish outfits and fewer pieces of loungewear.

The new class of clients is engaged

"We saw strong client demand from first-time and reactivated clients that resulted in our second-highest quarter-over-quarter client additions on record," Spaulding said. "In line with recent quarters, nearly 80% of our first-time Fix clients in the quarter purchased at least one item and shared that they look forward to their second Fix." 

Other engagement metrics showed a strong market-share position that only got better in early 2021. Stitch Fix kept customers happy by offering them products they wanted, at the right prices. Signs of that success showed up in places like repeat order volume, average order value, and customer retention.

While it's still early on, wins here suggest that Stitch Fix could be building a connection with its clients that will see the company through many different selling environments. "We are a relationship-based brand," Spaulding said. "Creating a more curated and discovery-led ecosystem of personalized shopping experiences is truly transformational."

Direct buy could be huge

"We're now embarking on our next growth horizon through our introduction of direct buy, which expands our ecosystem of experiences and opens up a total addressable market," company founder Katrina Lake said.

One of the biggest disappointments in last quarter's results was the fact that the new direct-buy offering wasn't performing up to management's high hopes. Lower purchase rates were a major factor that executives cited as they lowered their annual outlook.

But Stitch Fix has apparently worked out the kinks and is ready to roll out direct buy nationally. This is more than just a product enhancement, too. It might have the potential to dramatically expand the chain's shopping footprint beyond just the clients who want to subscribe to receive curated boxes of apparel.

Direct purchasing gives Stitch Fix a shot at an online apparel market that's sitting at $127 billion today and should grow to around $220 billion by 2025. That helps explain why investors became enthusiastic about the stock again in recent days, given that the company is currently generating only around $2 billion in annual revenue.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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