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5 Key Takeaways From Stitch Fix CEO Katrina Lake

Karen Mikolainis, The Motley Fool

Personalized, internet-based, and guided by artificial intelligence, fashion clothing company Stitch Fix (NASDAQ: SFIX) is not a typical retailer. Investors have been curious and cautious about this newcomer since its initial public offering in November 2017.

At the recent JP Morgan Global Technology, Media, and Communications Conference, Stitch Fix founder and CEO Katrina Lake helped investors better understand the company's direction. Here are five major takeaways from the conference that investors should know when considering an investment in Stitch Fix.

Woman looking at Stitch Fix style cards

IMAGE SOURCE: STITCH FIX.

1. Stitch Fix is not a subscription company

While many investors initially compared Stitch Fix to subscription companies like the now struggling meal-provider Blue Apron, Stitch Fix is not a subscription company. Clients have the option to receive fixes (i.e. orders) at regular intervals, purchase fixes one at a time, or put their account on pause when they feel their closets are full. Because Stitch Fix emphasizes personalization, its customers are in total control. Lake explained:

The reality is that people don't buy clothes in a way that an internet model might assume -- if you're spending $1,000 a year, that you're spending $100 a month on clothes -- that's just not the way that people buy clothes. We want to make sure that our service is there so that we can deliver clothes in whatever way that people want. So in that case, sometimes, people are having clothes delivered quarterly. You don't have to buy any amount of those clothes, so even when people decide on a cadence, there's still not a subscriptive element to it, because you're still really just buying what you choose to buy in that quarter.

Although Stitch Fix's sales to each customer vary, the company succeeds in doing what's best for its clients and generates loyalty. It's the relationships between stylists and customers, successful product recommendations, and satisfying shopping experiences that keep Stitch Fix customers coming back for more. This strategy is working. Stitch Fix's average revenue per client and keep rates are increasing, and more than one million clients have reengaged with Stitch Fix after 16 or more weeks of inactivity. 

2. Growth is our choice

Investors should understand that while Stitch Fix's growth rates are far ahead of traditional retailers like Macy's or Nordstrom, Stitch Fix is not pursuing the growth-at-all-costs model that investors see from high-flying software-as-a-service companies. Instead, Stitch Fix plans for consistent growth over time and manages its business to meet those targets. The company has been growing at approximately 20% to 25%, a growth rate that the company has intentionally targeted. At the conference, Lake described how the company sets its goals:

We're planning for our fiscal year ahead, and we'll say, "What is the growth rate we want to achieve?" and then figure out what ammunition we need to get there [...] A lot of the growth rates you see at other internet companies are the maximal growth rate that the company was able to achieve in that quarter and not what they chose.

To avoid disappointment, potential Stitch Fix investors should understand that the company is specifically managing its expansion to hit pre-planned targets. So far, Stitch Fix has proven capable of delivering consistent, sustainable growth rates.

3. Personalization is the future of shopping

It's sometimes difficult for me to summarize Stitch Fix's business. Is it a traditional retailer? A fashion company? A tech company? While it's easy to get lost in the details, Stitch Fix describes its service with ease -- "personal styling" -- with an emphasis on personal. Stitch Fix is in the business of personalization. Lake shared how important this is for the company:

What's really special about Stitch Fix is that 100% of what we sell is based on recommendation. We're all in on this idea of personalization and recommendations, and that is where all of our focus is spent. And it's a bet on where we think the future of apparel retail shopping is going to be, which is that whoever can personalize best is going to be the one who can win.

Offering a great shopping experience is top of mind. When talking about what makes a successful stylist, Lake noted that empathy, listening, and understanding what the client wants are the most important attributes of the Stitch Fix styling team.

When asked about competition, Lake said that her team is not seeing many competitors who are approaching personalization the same way that Stitch Fix is. And for now, the company is competing more with traditional physical retailers than other online companies. As more clothes shopping dollars come online, Stitch Fix hopes to capture more and more of the market.

4. Active clients are number one

When faced with higher-than-expected customer demand during its fiscal  2019 second quarter, Stitch Fix chose to defer advertising dollars to later in the year. Stitch Fix seeks to balance customer acquisition efforts to ensure that new clients are not brought in when inventory is tight, which would reduce available selection and likely result in less satisfactory experiences for customers. 

Lake explained the value of satisfying existing customers first and foremost:

We have healthy, great customers that are buying more and who are happier with us. I love seeing that number grow, and I would love to see if I could make a trade, I would love to see more of our growth coming from that bucket, because that's really great for the longer term. The more we can help make clients happy, the more we can have them stick around for a long time and work with us for many years, the more we know that we are able to serve them well the first time. All of that is so good for our business and has really great long-term effects. 

Growing revenue from current customers and gaining new customers are both necessary for Stitch Fix to achieve its goals. As Stitch Fix spends on more advertising and marketing, Lake noted her preference for finding high-value customers via targeted approaches, where the cost of acquiring a new client is more expensive, but the payback is quick and profitable. The company will try to focus its acquisition efforts on the kinds of shoppers who are most satisfied with Stitch Fix versus broad brush approaches that bring in a higher number of customers that may or may not be the best fit for the service. 

5.  Men use Stitch Fix, too

Stitch Fix skeptics may be surprised, but Lake reported that the Stitch Fix Men's service, launched in the fall of 2016, is performing very well.

The men's offering has been fantastic. We're so, so happy with it, and I think 2.5 years in, I would say just recently it feels like it's no longer in its infancy. [...] It feels like a business where now we can put marketing dollars against it, now we can drive efficiency in it, now it has significant scale and so we can do really cool things with it and so we're just really, really happy with the men's business. 

Stitch Fix put considerable effort into developing the men's service, specifically working on men's fit preferences and developing exclusive brand offerings to fill gaps and ensure that the quality, price points, and styles offered meet the needs of its customers.  

On average, men spend about 66% of what women spend on clothing purchases. Lake reported that at Stitch Fix, men's spending levels are reaching more than 80% of women's spending levels. Stitch Fix's emphasis on men's fit and personalization is working, and this category should continue to drive growth.

In addition to its men's offerings, Stitch Fix's additional service expansions in plus sizes, children's wear, and its recent launch in the United Kingdom are laying the groundwork for future growth.

What's next for Stitch Fix? 

As Stitch Fix continues to acquire new customers, gain loyalty and share of wallet, and scale up its newer categories, investors should expect the company to stay on its trajectory of consistent, strong results

This potential disruptor hasn't been easy for investors to understand. If the market remains uncertain or even doubtful of Stitch Fix's approach, bullish investors may find some attractive buying opportunities. 

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Karen Mikolainis owns shares of Stitch Fix and has the following options: long January 2021 $20 calls on Stitch Fix and short September 2019 $22 puts on Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.