Stitch Fix Shifts Strategy to Focus on Direct Purchases With Freestyle Offering

Stitch Fix executives assured investors and analysts Tuesday (Dec. 7) that recent investments in the business that have led to losses on the balance sheet will pay off in the long term as the company transitions to providing a wider set of features and purchase points.

Elizabeth Spaulding, CEO of Stitch Fix, said the company previously may have downplayed the magnitude of the transformation it’s currently going through, telling analysts on a conference all that “it’s a very exciting phase for the business.”

“In the last year and a half, we’ve embarked on our second chapter, and it really changes so many elements of our business to build on the foundation of personalization that we built,” she said.

The newest offering is Freestyle, formerly known as Shop and Direct Buy, which allows customers to purchase recommended items directly from Stitch Fix rather than having a stylist package and ship a box of surprise suggestions. Stitch Fix also recently introduced a Fix Preview feature, giving customers the opportunity to see up to 10 items before their box ships.

“We are at the very beginning of this next chapter for Stitch Fix, to transform and evolve from our unique Fix model for styling clients into the global destination for personalized shopping, styling and inspiration,” Spaulding told analysts on a conference call, noting that she does not expect “a linear journey.”

“There will be significant learning and experimenting to build this future of retail experience,” she said.

Central to the Stitch Fix model, Spaulding said, is the “rich data feedback loops,” starting with the initial style quiz and continuing throughout the customer journey, that help the company understand their shoppers and refine its offering. For example, she noted that Stitch Fix has already adjusted the onboarding process for new Freestyle customers to better balance personalization with a consumer’s desire to quickly start shopping.

“We are in a moment of transformation, which will be a multi-year endeavor,” Chief Financial Officer Dan Jedda said. “The investments we are making now will allow us to unlock the long-term opportunity that Freestyle presents.”

Spaulding said Freestyle also allows Stitch Fix to capture “more purchase occasions” and product categories, such as footwear, accessories, dresses, outerwear, sleepwear and loungewear, that have been underrepresented by Fixes. She added that these categories represent $90 billion in the U.S. women’s market alone, and footwear, accessories and dresses together saw a 50% increase year over year in Freestyle, which is five times the growth rate seen in Fixes for the same categories over the same period.

In the first quarter of its fiscal year, which ended Oct. 30, the company recorded $581 million in net revenue, a 19% increase compared to the same period last year. Revenue per active client surpassed $500 for the second quarter in a row, reaching $524 across nearly 4.2 million customers.

Customer Acquisition Issues

Jedda told analysts, though, that the quarter’s sequential net client addition of 15,000 was below expectations, with the company continuing to test new client acquisition and onboarding methods for Freestyle, which has impacted conversion of Fix customers.

Jedda also said a high-dollar-value referral program for new customers that ultimately brought in clients who were not active for as long as Stitch Fix had anticipated also impacted the net client adds, something that will also impact the second quarter of the fiscal year.

“We continue to test, learn and evolve our onboarding process and our marketing channels with the focus on adding new clients that engage with us over the long term,” he said.

Spaulding noted that one of the challenges for Stitch Fix is that the company has not previously had to find ways to onboard customers directly to Freestyle, and a majority of the Freestyle clients are those who also use the Fix offering.

“People are making a trade-off between do I want to try Fix, do I want to try Freestyle,” she said. “And so that’s the learning phase we’re in right now. We see an opportunity to get better and better and really grow the overall net adds with our clients, but I think in the short term, we anticipate some learning over the coming quarters.”