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Stitch Fix CEO: Direct Buy Business Can be an ‘Acquisition Engine’

Coming off a fourth quarter that brought Stitch Fix its highest sequential new shopper growth rate in three years, the online personal styling company has reason to be optimistic about its future, even in an otherwise faltering apparel industry where people are buying fewer clothes.

In fact, founding CEO Katrina Lake is holding firm that 20 percent to 25 percent annual growth is still a reasonable goal for the company for the foreseeable future.

In a virtual fireside chat at the KeyBanc Capital Markets Future of Technology Series on Friday, Lake said the company is in the middle of a $400 billion apparel market opportunity where it is in a position to take share up for grabs—even as the market itself continues to shrink.

“We’re trying to experiment with models where we have more flexibility in inventory and we may not have to own all the inventory,” Lake said. “Owning inventory to prepare for 40 percent growth is a crazy thing to do. It comes down to how we can actually look at our vendor base to be able to have the possibility for accelerated growth rates without using our balance sheet to do so.”

One of these experimental business models, direct buy, has become a larger part of Stitch Fix’s overall offering, and is still a work in progress that the company is trying to figure out, according to Lake.

“I think there’s still so many product improvements we can be doing on direct buy by having it generate fixes and become an acquisition engine,” Lake said.

The direct buy business, which enables shoppers to buy single items and get exactly what they want instead of only being able to purchase customized fixes on an incremental basis, has been gaining traction, with the percentage of women shoppers using direct buy growing into the high-teens, while men’s grew into the high-single digits.

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It’s a far change from the company’s original business model, in which shoppers would receive a “fix” shipment, which is a box containing five clothing and accessory items curated by a combination of personal stylists and algorithms. Those choices are based on information shoppers offer up in an extensive questionnaire when signing up, and then in the continuous feedback gathered after each shipment.

When compared to the company’s prior “fix-based” product recommendations, direct-buy shoppers purchased more items on average, bought products with higher average prices and converted at higher rates.

The company also recently has expanded its plus-size assortment and increased the marketing behind the product, helping Stitch Fix become more inclusive overall.

“This is now three years ago that we launched plus-size and we were able to do it in a way that brought lots of vendors along,” Lake said. “There were vendors that had never had a plus-size offering until we brought them along with us. One of the collaborations that we had was with Karl Lagerfeld who had a reputation of being not for plus-size and the fact that one of our first exclusive collections was Karl Lagerfeld is kind of symbolic.”

Lake gave some slight insight into the company’s sustainability initiatives as well, given the topic’s continued popularity across the industry. Stitch Fix has set a goal to have 100 percent of the materials in its private-label products and exclusive brands to be sustainable by 2025.

She even called out department stores and other large apparel retailers as companies that aren’t doing enough to be energy efficient, but admitted that Stitch Fix’s minimal carbon footprint in comparison largely results from a lack of physical store footprint.

“As an apparel industry, probably the single worst thing we do is actually heat and cool these huge department stores that have no people in them,” Lake said. “Think about all the things we do as individuals to try and save in a smaller footprint that we live in, and then you compare that to the lack of responsibility in terms of the heating and cooling of these huge number of stores that…are much less trafficked.”

Stitch Fix conducted its own internal study, not shared with the public, since the company has faced questions about the carbon footprint of the try-on model, specifically related to the constant in- and outflow of packages. Lake contended that the company leaves no room for air when packaging items in the boxes, and that the polybag that shoppers return the merchandise with is designed to do the same.

Lake also touched on the company’s first foray outside the U.S. when it expanded to the U.K. in May of last year. Although the launch occurred during ongoing Brexit talks, making it a “sub-optimal” time to enter the market, the company was able to maximize the opportunity by accessing talent and resources that were likely available because other companies weren’t investing in the country at that point, she said.

So far, Stitch Fix says the expansion across the pond has been a success, with average unit retail price growing by approximately 20 percent year-over-year, translating to a lift in average order value of more than 40 percent for the region. The company has since adapted to some of the tactical, operational details within the market such as how shoppers in the U.K. are often choosy when it comes to the specific third-party click-and-collect provider they work with.

“U.K. has much higher apparel e-commerce penetration there than in the U.S. and I think in some ways that actually makes it easier,” Lake said. “People are willing to sign up and give us a try and although it’s still early innings, all these factors have really helped the market’s momentum.”