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Stitch Fix Is a Reopening Stock You Shouldn't Miss

By Parkev Tatevosian - Jun 30, 2021 at 8:53AM

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After more than 15 months of pandemic-impaired business operations, the world is opening up again, and Stitch Fix stands to benefit.

Stitch Fix (SFIX -3.26%) is an online apparel retailer with a twist -- it adds personalization to the shopping experience through data and human judgment. The combination has been appealing to millions of customers. 

Shopping for clothing can be incredibly inefficient. In addition, your local store(s) may not carry items that match your style, fit, or budget. Stitch Fix attempts to solve all three of those problems with personalization. And folks are increasingly finding it a better way to shop for clothes. 

Moreover, as economies are reopening, people are ramping up spending on clothing to interact with the world again. 

A couple shopping, with a man carry an overwhelming number of bags.

Image source: Getty Images.

Personalizing the shopping experience

If you are anything like me, you dread the need to go to your local clothing store to update your wardrobe. It can take hours to find items that match your needs. Then, more time to find the right size. What makes matters worse, different clothing types use different measurement metrics. Are you a size medium, large, extra-large? A size 30, 34, or 38? A size 10, 11, 12 in shoes? Depending on the store, you could be all three. Keeping track of all the variations requires a spreadsheet. During my last trip, I took a notepad with several key measurements just so I could make the trip more efficient. 

Stitch Fix has made a good business for itself by helping solve these problems. First, a new customer on the site tells the company personalized information about size, style, and budget. Stitch Fix will then curate a selection of items it predicts the customer will want to purchase, sends the customer the package of items to try on, and the customer can return whatever was unwanted. Importantly, the customer can let Stitch Fix know more specifically why they are returning the item. Was the item too small in the waist? To tight around the shoulders? Too long in the leg? 

Based on what the customer keeps and the data provided along with returns, Stitch Fix can update this customer's info and improve recommendations in the next package. The customization advantage is in part leading to customer acquisition. Indeed, Stitch Fix reported having 4.1 million active customers, increasing 689,000 from the prior year and 234,000 over the previous quarter.

A person holding up a dress against their body and smiling.

Image source: Getty Images.

Built for the times

Unfortunately for big-box retailers like Nordstrom and Macy's, their physical brick-and-mortar locations are becoming a competitive disadvantage. Folks certainly appreciate the option to walk into a store near their home and buy things they want, but not to the extent that justifies stores' huge expense of maintaining such locations. That's been a key factor in the decreasing operating profit margins for these retailers as revenue growth has slowed down. 

In contrast, Stitch Fix's e-commerce status saves it the massive rent expense and allows it to spend on delivering customer personalization. The more efficient spending makes management believe it can achieve an operating profit margin of 10% to 12% in the long run.

Further, while the overall apparel market in the U.S. and U.K, where the company operates, is estimated to grow at a compounded annual rate of 6.6%, the online apparel market is estimated to grow 11.6%.

As folks return to dining out, going back to school, and getting back to the office, the demand for fresh clothing is on the rise. And because Stitch Fix is positioned to benefit from that trend through its underlying convenience advantage, it's certainly a reopening stock that investors should keep an eye on. 

 

Parkev Tatevosian owns shares of Macys. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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