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Stitch Fix CEO Plans ‘Aggressive’ Plus-Size Investments

By many accounts, Stitch Fix had a solid fourth quarter to close out its 2020 fiscal year, seeing net revenue jump 11 percent to $443.4 million, active clients increasing 9 percent to 3.5 million and net revenue per active client increasing a slight 2 percent to $486 even in the middle of a period where most people weren’t spending as much on apparel.

The San Francisco-based startup is seeing major acceleration in its women’s and plus-sized categories as well, and even reported that return rates associated with its “direct buy” shopping option have been less than half that found in traditional apparel e-commerce.

But the online personal styling service got hit hard by Wall Street as it incurred a quarterly loss of $44.5 million on a 44-cents-per-share loss, with the Stitch Fix stock price plunging more than 15 percent in after-hours trading on Tuesday. The company recognized an estimated non-cash tax expense of $43.2 million in the quarter, which makes up almost the entirety of its losses. Stitch Fix is forecasting mid-to-high-single-digit revenue growth in its current first quarter, below Wall Street’s expectation of nearly 11 percent.

Nevertheless, the company saw strong growth in multiple categories as more consumers shifted online when non-essential stores shut down. In the period, women’s first “fixes,” which are the boxes of clothing and accessories curated both by personal stylists and algorithms alike, grew approximately 25 percent year over year on an adjusted basis. In tune with industrywide trends, women’s activewear revenue grew by over 350 percent year over year across both the fix and direct-buy business models.

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Plus-size products within its fix business saw much higher demand in the fourth quarter to the tune of exceeding 35 percent growth year over year, with the company expecting to take up greater share in the category due to what it says is its understanding of fit and sizing as well as exclusive assortments and strong market vendors.

“Plus [size] also benefited from year-over-year growth in success rate and average order values in the fourth quarter and fiscal 2020 as we broadened our assortment across price points and end uses,” Katrina Lake, Stitch Fix founder and CEO, said in the company’s earnings call. “While plus represents a low-double-digit percent of women’s clients today, we think it comprises 40 percent of our women’s addressable market, and we plan to invest aggressively in plus inventory in fiscal 2021 to support further acceleration.”

Stitch Fix increased gross margins by 410 basis points quarter over quarter to 44.9 percent, driven by a reduction in inventory reserves as it stabilized its inventory position.

In July, the company saw a 50 percent year-over-year increase in first “fix” shipments to new customers, and saw elevated growth continue through the month of August. This is the highest sequential first fix growth rate the online personal styling startup has seen in the past three years, Lake said.

And despite the overall apparel headwinds, Stitch Fix generated $51.8 million in free cash flow in the quarter, ending the period with no debt and $381.6 million in cash, cash equivalents, and securities.

The company wouldn’t provide a full-year outlook for fiscal 2021, but does expect year-over-year revenue growth to accelerate “meaningfully” in the second half.

A lot of Stitch Fix’s positivity emanates from the company’s projection that more than $30 billion of market share will move online in the next 12- to 18-months.

The styling service’s expansion of its 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, seems to align with this expected reality. 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, according to Elizabeth Spaulding, president of Stitch Fix.

From the launch of direct buy through the end of the quarter, nearly two-thirds of clients who completed a direct buy purchase returned to make a subsequent purchase, she said.

“While we won’t share direct buy penetration every quarter, we’ll note that women’s penetration grew into the high-teens percent, while men’s grew into the high-single digits, with both categories demonstrating strong traction, but also meaningful headroom for growth,” Spaulding said on the call. “We also achieved very high success rates driven by our ability to pair data-driven recommendations with clients’ high-intent purchase decisions. As a result, return rates associated with direct buy have been less than half that found in traditional apparel e-commerce. These client outcomes have led to strong repeat purchase behavior.”

In June, Stitch Fix introduced the “Trending for You” beta test within direct buy, so that shoppers could receive product recommendations without having made a prior purchase. The new feature enables shoppers to browse personalized looks based solely on their style profiles.

After the first two weeks of introducing the feature, weekly direct buy orders grew by more than 30 percent, suggesting to the company that as it adds features and broaden ways to engage and shop, it will be able to capture a greater share of shoppers’ wallets.

In July, the company also introduced an algorithmic recommendation engine exclusively for direct buy shoppers to more fully capture their interactions and preferences. Stitch Fix is now preparing to build out more enhancements like these in the 2021 fiscal year in an effort to widen product discovery for both inspiration-based and higher-intent purchases.

Stitch Fix also thinks it can drive incremental cost savings and thus further margin expansion with new feature additions to the direct buy ecosystem. In August, the company introduced its shopping bag functionality, which is a cart-like feature that combines multiple items into fewer shipments, to all direct buy shoppers.

“I think what we’re excited about is the gross margins of direct buy,” Spaulding said. “We’re already at parity with our Fix offering and now with the kind of benefit of consolidated shipping that we’ll be incorporating, we would expect to see margin enhancement, as well as other new features that we’re launching with the cart where something ends up being out of stock—we can help recommend items that are similar to consumers. So, more to come as the cart is in place for a longer period of time, but we were seeing people buy multiple items pre-cart as well.”