Stitch Fix’s fiscal fourth-quarter earnings call Tuesday was marked by highs and lows, sending shares roiling at the news of better-than-expected earnings paired with soft guidance for the next quarter.
The reasons seem logical. In its shareholder letter, the company explained that, while business was brisk for summer products, they “carry lower average unit retails and average order values.” The company also spent less on marketing during the quarter, so there were fewer clients to feed the revenue pipeline as the next quarter kicked off.
Now, Stitch Fix expects to bring in $438 million to $442 million in revenue for the current quarter, which falls below Wall Street’s consensus of $451 million.
WWD spoke with Stitch Fix president and chief operating officer Mike Smith about the guidance and the company’s investment strategy, as well as where it sees the future of retail.
WWD: Let’s talk about some takeaways from the earnings call and the guidance for next year.
Mike Smith: We’re about to lap our two-year anniversary of being a public company, and we’ve delivered on the high end of our revenue range. As we think about guiding for fiscal 2020, we’re guiding to 23 to 25 percent growth, which is the high end of the ranges we’ve given as a public company.
We see [that] as our choice, over the next few years, to grow off of this base. And we continue to be very confident in our ability to do that — we’ve certainly shown that, for the eight quarters we’ve been a public company. So we’re excited about the business performance.
We’re pleased with the high engagement that we have from our client base. And that primarily shows up in revenue per client — on things like how Style Shuffle influences our understanding of a client’s style better or buying better merchandise. Because we have so much information about what merchandise we should buy and, really, the operational excellence of styling good fixes and shipping when we say we’re going to ship them.
WWD: On the call, you talked about beefing up investments. Can you elaborate?
M.S.: We’re leaning into a pretty healthy and aggressive investment strategy. And that comes from our confidence in investing specifically in data science and engineering, around the return we’re seeing on things like Style Shuffle, on things like direct buy, on things like our global inventory optimization algorithm.
We see a lot more opportunity to build these capabilities on top of a category investment that we’ve made over the last couple of years, of adding things like Plus and Maternity, and Kids in the U.K. I’d say the next set of growth that we see will come from capabilities. We’re building on top of these categories, so the investment strategy that we have is assertive. But we’re very confident in our ability to deliver value in the things we’re investing in.
Personalization is the future — we feel so strongly about that. Katrina [Lake] started this company believing that very strongly. And now, almost a decade into running the company, we couldn’t have more confidence of personalization as the future.
We do not see the existing brick-and-mortar experience or the existing e-commerce experience as one that’s really personalized to the clients, the way that we’re doing it. And we believe that the platform that we built around personalization is the future of retail.
As a company, we’re very proud of this balance between growth and profitability. There are plenty of companies out there, some that have more recently gone public, that have tens of millions, if not hundreds of millions, of dollars of losses that they’ve had since they started the company. We couldn’t afford to do that. We have always had financial discipline, in order to have a great business that delivers profits. And we were able to launch things, like Kids in the U.K., self-funding that growth in those new categories.
As a result of a great unit-economic model, we feel really comfortable that we can continue to build these capabilities, and won’t have to use any kind of public or private markets in order to fund that, because of how well we’ve done in delivering profit on this platform.
WWD: The stock has gone on quite a ride, with shares falling as much as 15 percent in trading on Wednesday. Are you concerned about that, and what do you have to say to investors who may be feeling unease?
M.S.: The daily volatility, or even after-market volatility, which — I think I saw plus-10 and minus-10 in the course of an hour — it’s not something that we spend a lot of time worrying about. It’s so volatile, and it actually doesn’t represent real trading patterns over a course of weeks, months and years in the company.
We care deeply about the micro things that we have control over. Can we continue to deliver growing active clients? You know, we delivered almost half-a-million clients year-over-year. We care deeply about making sure we have a great client experience, which shows up in revenue for active clients. [Stitch Fix reported 18 percent growth in active clients.]
I’d say, for future investors, look at the performance that we’ve had since we’ve been a public company and, frankly, since Katrina started the company. We’ve always delivered on the numbers that we’ve said. We’ve always delivered within guidance on revenue and guidance on profit, because we care deeply about being a great public company. And that’s what we have been, at least for the two years to date.
We spend less time worrying about macro things — like what’s going on in the economy, what’s going on in the apparel space, what’s going on with Brexit or tariffs, etc. — and more time trying to continue to build a great company. How to deliver on the opportunity we have on personalization and in different forms other than “five items in the fix,” like direct buy and those kinds of things.
WWD: You talked about the push to hire more tech talent. Are you exploring new areas, or are you looking to reinforce the tech you already have?
M.S.: There’s a laundry list of a lot of other things that we believe we can do with personalization on this platform. But the capabilities that we’re building can give a client a really hyper-personalized and highly curated shopping experience of 30 to 40 items that is fundamentally different than the way apparel is done an e-commerce sites today.
We have a number of other things, like the number of ideas that we have for enhancing the client experience — new categories, new forms of personalization — really is endless. And a lot of that comes to life in data science and engineering investments that we’ve made.
WWD: On the call, Amazon’s new personal shopper service came up. It sounded like the company was not very concerned about it. Why not?
M.S.: A lot of it has to do with how we think about what is the best way to deliver a great apparel retail experience. The best way from our perspective is to build trust with a client over time through the style profile and the feedback that they give us. They know we will make fixes better over time and deliver them great brands — private-label brands, or what we call exclusive brands, and great market brands.
And [it will be] a really fun experience in their home, with men’s and women’s “five items in your fix” and kids’ “10 items in your fix.” And so that’s the future of retail. As long as we’re focused on that, we feel really confident that we will continue to take share.
If you look at the growth that we’ve delivered and look across the retail industry, there isn’t anybody that’s delivering that kind of growth. As Katrina mentioned, 80 percent of shopping is still done in stores. Most of those stores continue to struggle with fixed assets that don’t make sense, with store associates that are harder to train at scale. And, frankly, they don’t have the breadth of product and the breadth of experience that clients want today.
And so we’re able to do that at scale and profitably, and feel really confident in our ability to continue taking share from the 80 percent that exists in brick-and-mortar retail today.
WWD: So, Stitch Fix won’t be opening up a brick-and-mortar anytime soon? So many digital natives are exploring that.
M.S.: If there are ways to get better data, that allow us to serve clients better or understand fit better as a result of having a physical presence, then we’ll look at those things. But today, we have plenty of opportunity to go after the $430 billion of good TAM, or total addressable market, that we have in front of us.
And these businesses, like the U.K. and Kids, are just getting started.
I think the brick-and-mortar strategies for some of these other companies is the result of finding it harder to grow at the scale that we’ve been at. I mean, we try to remind people that we’re guiding almost $2 billion in revenue. Some of these direct players are nowhere near the scale that we’re at.
And the more scale we get, the more data we’ll have, and the more advantages we’ll have to to provide growth to brands. So every day that we grow to 23 to 25 percent is another day that I think we provide differentiation through our brands and create more of a moat from competition.