Why This Feature Could Be Game-Changing for Stitch Fix

For the last decade, Stitch Fix (SFIX 3.69%) has built its business around shipping customers a "fix." A fix is a shipment containing five items of clothing selected by the company's proprietary algorithms and a personal stylist. Clients didn't have a chance to "weigh in" on the selected items and wouldn't know what was coming until it shipped. But this is changing. On a Fool Live episode recorded on June 16, Fool contributor Brian Stoffel and Brian Withers discuss how a small tweak the company is making to the process could be game-changing.

Brian Withers: Moving on to Stitch Fix, SFIX. Released earnings, Monday, June 7, a little over a week ago, earnings were absolutely solid, 44% increase in revenue, and 20% sequential increase in active members. So coming out of the coronavirus, I think Stitch Fix is starting to capture customers as we're having to figure out what kind of clothes to put on to go outside.

But the thing that's exciting to me about Stitch Fix is something called Stitch Fix preview, and I think this could be a hidden superpower of the company. Historically, they started with the five-item fix. You fill out your profile, you answer a bunch of questions and they'll send you out five items that they've picked for you, and it's a surprise when you open it up. Having been there when my wife has opened up some fixes, sometimes it's like, it just doesn't work out, so the company has been trying to improve what they call the fix hit rate, and you only pay for what you keep, so the more of those five items that customers keep, the better experience it is for the client and the more revenue for Stitch Fix, so they've tried a number of things to improve this.

First, they tried a 30-minute video conferencing call. That was just tough; challenge for time, it uses up their stylists' time as well, and that's not really scalable to millions of customers across the enterprise. Enter the fix preview. Once the fix or the five items are selected by the algorithm and gone through via the stylist, they're presented, if you want, the client can opt-in and they can ask for things to be kicked out of the fix and replaced with something else. And so this has been a tremendously positive change that they've made, 75% of clients are actually opting in. They started it in the U.K., and now it's spread across the U.S., and this has led to "strong repeat engagement, which is also driven higher success rates and higher than average order values." This is gold.

I think this is something that Stitch Fix has needed to do for a while and I think they've finally figured out something that will help clients get better fixes and attract more revenue per client over time.

Brian Stoffel: All right. Before I ask my question, two fun stories. One, I use dStitch Fix, but I only used it a couple of times in 2018, and then I had a lot of experiences like your wife did Brian, where I was like skinny jeans with cuts in them, I'm a late-30s dad, you can do better.

But one cool slash creepy thing, my son was born right after one of the Stitch Fix's [shipments] and I didn't communicate that with anyone at Stitch Fix. But one of the things they do is they ask for your Twitter handle, and so I gave it to them because why not, and I shared that our son had been born and Stitch Fix sent a Milwaukee Brewers onesie to me with a handwritten note on it. I thought that was pretty cool and creepy, but I side on the cool because it was a brewers thing, I'll go with it.

Getting back to our point. I read this, and I hear what you're saying, and I do think it's a good idea, but I'm also like, so what is it that Stitch Fix does that's really any different now? Maybe this doesn't matter, but I'm just wondering if this change of letting people pretty much kick things out of their boxes, if it blows up what was supposed to make it special?

Because then how is it any different than me going on Amazon, or Kohl's, or whatever? But again, maybe that's something I don't even have to worry about because for some reason it's attracting people and they're staying and they're buying more and all of that. Does that concern you or am I overthinking this?

Withers: I think you're right to question it. It's important as we look at our investments and they do things like change their core product over time. It's something that investors go, eh, is this a good thing? You also have to remember that what Stitch Fix is doing is never been done before at scale. I look at them like all successful disruptors go through a trial-and-error product period where their first idea is great, but it maybe doesn't scale.

Amazon started without Prime. Netflix tried to sell DVDs. Okta realized that its identity product could be used for customers, too, potentially doubling their market, so this is just Stitch Fix going through an experimental period. But your core question is, does the fix really even matter anymore? Is it just a normal e-commerce experience?

I would suggest that it's way different. Between the data that it's collecting and the machine learning in AI. Instead of shorting through an endless supply of e-commerce products for anyone, you're sorting through a personalized one powered by its proprietary suggestion algorithm where every item fits, and it's a style or item that you're likely to love wearing.

I think this is a positive. A positive product change for Stitch Fix, and what I think they could do is turn this into a gift-giving platform. Imagine being a husband with lousy taste and no idea what size your wife is, and afraid to ask. But you can go on and select a number of items you know she's going to love, and that are going to fit her. This could be a lucrative opportunity for the company.