One thing became clear during Stitch Fix’s earnings call on Tuesday: For the fashion e-commerce and data-driven styling service, its direct-buy feature has become a lifesaver for the business — and a bit of an albatross.
For its first fiscal quarter of 2022, which ended in October, Stitch Fix revenue sailed over analysts’ projections of $571 million to $581 million, for 19 percent year-over-year growth. Adjusted earnings of $38 million brought Stitch Fix a gross margin of 47 percent, marking its highest ever.
But that wasn’t enough to buoy the stock. When the company’s revenue forecast for the fiscal year fell short of analysts’ expectations, shares plunged 17 percent in after-hours trading.
Stitch Fix has been beset by many of the same issues plaguing other retailers, such as supply chain constraints and iPhone privacy changes, which makes user tracking more difficult.
But there were other challenges unique to this business.
While the Freestyle direct-buy service drove more sales during the period, there’s still work to do to explain the service to consumers. According to chief executive officer Elizabeth Spaulding, traction for Freestyle is strongest among existing “Fix” subscribers — which is problematic, as direct buy was supposed to funnel in new business and feed subscriptions.
Meanwhile, active clients of 4.18 million may represent an uptick of 11 percent over last year, but it still doesn’t meet the 4.23 million analysts wanted to see, sparking worries that Stitch Fix has hit a wall for growth.
“Our sequential net client additions were low for the quarter,” admitted Spaulding. “We are at the early stages of this learning journey, and as a result of our testing in the first quarter, we experienced lower Fix conversion rates than we expected.”
But the company considers this a “transition period,” or learning curve, to bring in customers, and it’s diving deep into the matter of how to onboard new business. So with that, Spaulding sees this issue and the supply chain complications as just temporary.
Freestyle marks an evolution akin to a Stitch Fix 2.0, she said, and that brings significant learning and experimentation with it. In other words, it’s just growing pains.
“We may experience short-term impacts of cannibalization [between Freestyle and Fix]. We will be implementing new systems and we are building new workflows,” she said.
To solve for that, the company has already begun addressing the “paradox of choice” in presenting both services to shoppers.
“For some of our clients, they probably are very high intent — they just want a Fix. And you know, I think we acknowledge in the onboarding we may be distracting some of those clients with shopping and Freestyle, when in reality, they just want the support of a stylist,” she added. “So that’s an area of one opportunity, and we’ve already made some adjustments on that.”
Elsewhere, the company seems to be on better footing. Its Fix Preview feature, which lets subscribers vet upcoming shipments, has now rolled out across the U.S. and the U.K. and stoked growth in the Fix business. Revenue for women’s and kids in the U.K. market practically doubled year-over-year.
There’s even some good news with the much discussed Freestyle feature, which helped drive sales in previously underrepresented categories in Fixes, such as footwear, dresses, outerwear, accessories and sleep and loungewear, Spaulding noted.
That amounts to some $90 billion in the U.S. women’s market alone, she added, “demonstrating the opportunity ahead of us.”
But there’s clearly a lot of learning left for the company to do between now and then — primarily, how to appeal to the right consumers with the right service without muddling the message or confusing people. Investors, for one, hope it proves to be a quick study.