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Stitch Fix Is Making Some Big Moves

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The innovative clothing retailer is making some big changes to its business

Stitch Fix (SFIX -10.08%) has grown its business impressively over the years with its stylist-by-mail service. The company is making some of the most dramatic changes yet, and in this Fool Live video clip, recorded on Sept. 29, Fool.com contributors Brian Withers and Toby Bordelon discuss the latest developments investors should be aware of, and what they could mean to the business. 

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Brian Withers: Stitch Fix. I was pretty impressed with the most recent quarter, and I feel like they've announced their biggest change to the way their model works in the history of the company. Now, there's more ways to use this recommendation engine that they've built over the last decade to buy clothes from this online retailer.

Already, the company had a direct buy service, which includes trending for you, things that maybe other people are buying that would go well in your wardrobe. Complete your looks, which is a way to add. They're picking accessories along with things that you've purchased already. This is all built on this algorithm to show their clients specific pieces that they would like or maybe they go with things they've already purchased. The shop-by category allows you to browse recommendations for specific occasions. Again, the early results of all of these look really good.

But now, they've launched something called Stitch Fix Freestyle that allows any customer, even a brand-new one, to shop directly from the site, from a curated selection of clothes picked just for them. Management explained on the early earnings call that Freestyle allows customers to shop even directly for the brands that they love with the benefit of Stitch Fix algorithms. It also has branded shops where customers can find their favorite brands and gives the company a way to advertise directly to customers.

All righty. So they've just started this experiment with product listing ads, which will open up a new acquisition channel that was unavailable before. The early results look promising. Investors may be wondering, is this going to cannibalize sales from fixes? Well, it seems the opposite is happening and this complements the fixes already.

Nearly, 30% of its women's customer base has already shopped on Freestyle, so it's gaining popularity really quickly. I love how the company is innovating and trying different approaches to grow its business. The new CEO is in place, in early positive results from these experiments, Stitch Fix could continue its disruptive way, disrupting the way customers buy clothes.

Toby Bordelon: Brian, Freestyle does look interesting and I think it addresses some concerns people have had about the business in the past. One concern I have over it, though, is it turning Stitch Fix into more or just a regular online clothing retailer versus that fun get a surprise box that they were before.

Related to that, they had a great quarter last quarter, which was really good. It seems like emerging from the pandemic is not hurting them, which is what concern we have over some of these companies. That was a nice contrast early in pandemic, the results have been wondering, why aren't you doing better than you are, because this should be your sweet spot with stores closed. Are they finally turning the corner and is buying clothes online going to stick even as we start reopening?

Withers: Yeah. Really, the consumer is going to answer that question for us. But I think the company is doing just about everything in their control to become more relevant as people head back to buying clothes again. When you were just getting up every morning and attending Zoom meetings, the amount of clothes in your closet really didn't matter too much.

But now that folks are getting back out, I think it's certainly an opportunity for Stitch Fix to play in that wallet share. Are they becoming like a regular online retailer? I don't think so. The recommendation engine should enable you to pick from clothes that not only fit, but go with things you have in your closet and suit your taste.

Imagine, the more you buy this way, like Pandora music or other personalized services, the more you buy, the more it's going to get to know you, and the more it's going to pick clothes of something that you really like. Rather than going onto Amazon and typing something in and getting a million different choices, you're going to get stuff that's really suited to you and hopefully something you like and put in your checkout bin.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Toby Bordelon owns shares of Amazon and has the following options: short December 2021 $35 puts on Stitch Fix. The Motley Fool owns shares of and recommends Amazon, Stitch Fix, and Zoom Video Communications. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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