Shares of Stitch Fix (SFIX -2.22%) were off to the races following a solid fourth-quarter earnings report. With revenue up 29% year over year and active clients up 18%, the business has started to reestablish its pre-pandemic growth trend.
Coming off two strong consecutive quarters, Stitch Fix announced it was rebranding its Direct Buy service to Stitch Fix Freestyle, which allows all clients to buy specific items from the company without ordering a Fix. Management sees this service as a game-changer for its long-term growth. "Our vision is to become the global destination for personalized shopping, styling, and inspiration, supporting clients across all categories and occasions," CEO Elizabeth Spaulding said during the fiscal Q4 earnings call.
It's a bold long-term goal, but Stitch Fix already possesses the tools to execute on it, and it's starting to expand its assortment to new categories to open up its sales potential to a wider customer base.
The online styling service market is crowded. Two of Stitch Fix's top competitors are Nordstrom's (JWN -3.29%) Trunk Club and Amazon's (AMZN -1.80%) Personal Shopper by Prime Wardrobe. Nordstrom's differentiation is its access to high-end luxury brands, while Amazon has the advantage of more than 200 million Prime subscribers serving as a ready-made customer base for its service.
Stitch Fix's main advantage is its 10 years' worth of data gathered from client feedback. This data gets down to specifics like preferences for fit, price, and even how often a client wears certain styles.
The ability to roll out Freestyle and accurately recommend what a new client, who has no previous purchase history, will like is only possible because of Stitch Fix's data science capabilities. Looking at it another way, if a company released a feature like this without the necessary data to power sophisticated recommendation algorithms, it would be very risky. For example, new clients might sign up and decide to try a competing service if they don't like their recommended choices.
The majority of data that Stitch Fix collects is offered freely by the client, reflecting the trust that Stitch Fix will deliver relevant recommendations. So, in a way, Stitch Fix is already showing signs here of building a strong consumer brand in the apparel market, which could become another sustainable competitive advantage. Management now believes it has reached a point with its data science capabilities that it can begin to stretch its boundaries globally.
Preparing for international growth
To execute on its global vision for personalized shopping, Spaulding said, "We will invest in our biggest sources of differentiation, algorithms powered by consumer preferences, understanding of the drivers of fit, relationships with stylists, and vendor insights."
The U.S. currently makes up over 75% of Stitch Fix's sales, but it's seeing strong momentum in its primary international market right now. The U.K. posted triple-digit revenue growth in fiscal 2021, driven by a rapidly growing client base. This follows the rollout of Fix Preview, which allows all clients to preview items before their curated box of items is shipped to their door.
Freestyle will be a key weapon as the company prepares for international growth, as it shows management certain categories where clients are spending more. For example, footwear sales through Freestyle represented a bigger percentage of revenue in fiscal Q4 than with regular Fixes. Overall, revenue from Freestyle is growing faster than the rest of the company, up more than 100% in fiscal 2021.
It's no coincidence that in the first year of rolling out Freestyle, spending per client exceeded $500 for the first time. Management sees more opportunities to penetrate different categories across footwear, dresses, outerwear, and sleep and loungewear. As it does so, spending per client should continue to climb, adding fuel to Stitch Fix's top-line momentum.
Stitch Fix needs to keep innovating
The personalized styling market right now looks similar to a bike race. There's a peloton made up of several services racing down the road, but Stitch Fix is positioning itself at the front of the pack for a potential breakaway to the finish line.
Stitch Fix is setting a brisk pace of innovation and has a tailwind at its back. Online apparel sales are expected to grow at nearly twice the rate of the total apparel market in the U.S. and U.K. alone through 2025, according to data from Euromonitor International. Stitch Fix has some advantages to work with through its data and developing innovative new ways for clients to engage with the service.
Investors don't have much to lose here with this mid-cap stock. If Stitch Fix continues to execute, the upside could be massive.