The value proposition behind Stitch Fix (SFIX -0.87%) has always been straightforward. The company aims to revolutionize the way we buy clothes using data science to optimize selection based on style, fit, and budget.

Changing something as personal as clothes shopping isn't easy, but Stitch Fix took a big step forward in that quest with its recent launch of Stitch Fix Freestyle, an experience that allows any customer, even a new one, to shop directly on the site from a curated selection of clothes picked just for them. Historically, the company has sold clothes only through Fixes, or boxes of five items sent directly to customers, who then keep what they like and return the rest. That model helped the company grow to more than $2 billion in annual revenue -- but there are limits to that sales channel. It's only attractive to customers who want clothes selected for them, ignoring the vast addressable market of shoppers who prefer to shop themselves, as well as customers who may just prefer to get one item at a time as needed.

Stitch Fix is the leader in personalized styling, but that market is still small, as its $2 billion in annual revenue shows. With its launch of Freestyle, the company is expanding its addressable market to $127 billion, or 2020's total online sales of apparel, footwear, and accessories in the U.S. and U.K. (where it operates).

The expansion of Stitch Fix's addressable market is the most obvious benefit of Freestyle, but there are a number of other advantages it offers the company.

A woman opening up a box of clothes from Stitch Fix

Image source: Stitch Fix.

It's great for brand partnerships

Stitch Fix was already popular among many of the brands that it works with because it represents a new, growing, full-price channel. The traditional Fix model also offered a way to introduce customers to new brands. But it did not highlight the brands themselves. Freestyle changes that.

As management explained on the earnings call, Freestyle allows customers to shop directly for the brands that they love, which include Madewell, Rag & Bone, North Face, Vans, Levis, and DKNY, with the benefit of Stitch Fix's algorithms to help with fit and selection. It also has branded shops where customers can find items from their favorite brands, and gives the company a way to advertise directly to customers who may be searching for a specific clothing item like jeans or dresses through product listing ads that highlight a single branded item. The company has just started to experiment with product listing ads, which will open up a new customer acquisition channel that was unavailable through Fixes. 

The new offering will also help the company tap into clothing categories that have been underserved by the Fix model, like dresses, which lend themselves more to one-off purchases rather than the stock-your-wardrobe model of the Fix.

It increases shopping frequency

Stitch Fix closely tracks average revenue per user as one of its key metrics, and that measurement of customer spending has moved higher since it began offering Freestyle to existing customers, reaching $505 in the most recent quarter -- the first time it's been above $500. That's a sign that Freestyle is encouraging higher overall spending on the platform.

While some investors seem to think that the new offering will cannibalize sales from Fixes, the opposite seems to be true, and the use cases are often complementary. A customer who gets Fixes on a regular basis may want to supplement those with items from Freestyle, especially when they are looking for something in particular like a dress, a handbag, or a pair of shoes. Already nearly 30% of its women's customer base has shopped on Freestyle. 

Freestyle also increases customer engagement. If you're a customer who gets Fixes regularly, you previously had no reason to go to the Stitch Fix site. Freestyle, on the other hand, updates selections multiple times a day based on available inventory, encouraging customers to check in frequently, a smart way to get engagement from those who like shopping for themselves.

It opens up a world of optionality

Stitch Fix has focused on clothing throughout its history, and the company still has a long way to go in realizing its potential in that market. But Freestyle opens up the company's data science model to adjacent categories like beauty products, jewelry, and even home goods. It's easy to see how such a recommendation engine could work for similar products, as Stitch Fix already knows things about you like your style preferences, fit, and budget. 

While the company hasn't directly commented on that possibility, if Freestyle is successful with selling clothes, the platform could attract cosmetics companies and others, who could even license those algorithms if Stitch Fix doesn't want to directly sell those products.

Fundamentally, Freestyle makes Stitch Fix a much different company and gives it opportunities that it wouldn't have with just the Fix model. Those include allowing it to use other shipping methods that may be more efficient, like drop-shipping (because it doesn't have to send five items from one warehouse), and the ability to sell excess items on clearance, though that's not the company's focus. 

Stitch Fix's guidance for the current year was modest, calling for revenue growth of at least 15%, compared to 23% growth in fiscal 2021. But the company is still early in building out awareness for Freestyle. It's ramping up marketing around the launch, but sees Freestyle as a long-term growth driver that expands the business and the addressable market in a number of different ways. 

The 15% growth guidance isn't enough to get investors excited, but that could turn out to be conservative, as management noted that spending on Freestyle more than doubled last year. We'll know more when Stitch Fix presents its first-quarter earnings report in December, which will include the first results from the expansion of Freestyle to new customers. Strong top-line growth in the quarter from the disruptive apparel stock would be a very promising sign for the potential of the new platform.