Here’s how Stitch Fix will recover from its disappointing quarter

Point correction (NASDAQ: SFIX) saw its stock price plunge sharply following its fourth quarter financial results report. As demand started to pick up again, causing revenue growth to accelerate, earnings fell short of analysts’ expectations.

Looking more closely at the earnings report, the quarter was not that disappointing. Investors missed some crucial details during the conference call that show how Stitch Fix’s ability to use data science to recommend items to customers is expected to translate into market share gains over the next several years.

Image source: Getty Images.

Momentum returns to Stitch Fix

Stitch Fix posted 11% year-over-year revenue growth in its most recent quarter, which is lower than pre-COVID levels but up sequentially from fiscal third quarter. More importantly, it shows that the company is gaining market share over the many other clothing retailers who continue to report declining sales.

This performance is also remarkable considering Stitch Fix backed down on advertising from the end of March to May, which limited the growth of new customers. Still, during the earnings call, CEO Katrina Lake said, “Over the past few months our company has shown some of the highest levels of performance we’ve seen in public.” Â

In July, Stitch Fix saw a 50% year-over-year increase in Fix’s first shipments to new customers. This is the highest level of sequential growth in three years, which has helped to lengthen wait times for some customers.

Lake said, “We believe this first high patch demand will also result in additional patch volume in the quarters to come, as the majority of our customers choose to receive patches on a recurring basis.”

Direct buying service continues to gain traction

Direct purchase still looks like Stitch Fix’s secret weapon to gain more share in long-term clothing spending. In June, Stitch Fix rolled out a new direct purchase feature called Trending For You, which expanded the selection of items that customers can choose to purchase. It also removes the requirement that customers must have a pre-fix before purchasing an item using direct purchase.

The value of this service is that almost two-thirds of customers who use direct purchase have returned to make a new purchase. Plus, direct purchase return rates are less than half of the levels typically seen in online clothing retail.

In the first two weeks following the launch of Trending For You, Stitch Fix saw a 30% increase in direct purchase orders. Stitch Fix also made a recent adjustment to its recommendation engine for direct purchase customers, which led to more items purchased, higher conversion, and purchases of items with higher average prices. than traditional corporate “fixes”.

It’s clear that as management unveils new ways in which customers can purchase service, engagement and spend per customer is expected to increase. The penetration rate among Stitch Fix’s 3.5 million active customers has been low so far, so there is still a long way to go before direct buying makes its mark on the company’s performance. But President Elizabeth Spaulding mentioned during the call that it offers a “no change” in the company’s growth trajectory.

Just to start

The switch to e-commerce has spread throughout the retail business plays on the strengths of Stitch Fix. Management expects $ 30 billion in market share to move online over the next 18 months. “We plan to capture more than our fair share given the relevance of our model, especially with the expansion of direct buying,” said Spaulding.

Stitch Fix is ​​a very small player with just $ 1.71 billion in 12 month revenue in a large apparel industry. There is still significant leeway for the business to grow over the long term as Stitch Fix expands its offerings to reach new customers and drive greater engagement with existing customers.

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Jean Ballard owns shares of Stitch Fix. The Motley Fool owns shares and recommends Stitch Fix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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