Stitch Fix's Blend Of Two Sources Of Intelligence Is A Gem

Euromonitor International expects nearly half of U.S. apparel spending to shift online by 2025. To capture this tremendous opportunity, Stitch Fix Inc SFIX is ramping up investment. Although its recent earnings report was disappointing, the market committed the classic mistake of losing the forest for the trees.

The revenue miss was caused by shipment delays which is a short-term headwind.

Revenue of$504 million is still an increase of 11.6% YoY.

The delay in launching new product features means there is more growth to come.

The direct buy service has been resonating with existing clients. Instead of introducing it to new clients this year, management will launch these features toward the end of the fiscal fourth quarter, which will only shiftanticipated revenue growth to fiscal 2022. Expanding the addressable market and boosting revenue growth is still in the cards, just next year.

The number of new clients doesn't lie.

While carrier delays could continue to negatively impact revenue growth, the number of active clients is increasing and it reflects the real momentum happening in the business. After bottoming out with the economic shutdown, active client growth has started to accelerate back to double-digit rates, amounting to 12% in the last quarter. Growth in first-time fix shipments from new clients accelerated to nearly 50% YoY in fiscal Q2, almost doubling from the previous quarter.

The Business Model: A Blend Of Two Sources Of Intelligence

Stitch Fix is an online personal styling service that uses AI algorithms and human stylists working in combination to make recommendations to clients of items such as clothing, shoes, or accessories. The goal of this blend of art and science is to provide clients with a "Fix" in the form of personalized clothes choices that fit their style, size, and price range. There are now 5000 stylists across the U.S. and almost 150 data scientists with Stitch Fix being perhaps the first company to have a Chief Algorithms Officer. Machine learning models perform a variety of tasks by keeping styling, marketing, supply chain, customer service-connected, along with handling other aspects of the company's operations. The styling algorithms collect and use as much data as possible, with all client responses and particularly rejections being incorporated. Algorithms are great at taking all the data into account and at helping stylists know how are they doing in keeping clients happy.

The Human Touch

Styling involves both information data and human judgment. Stylists have the final say as notes and preferences like "I'm just about to start a new job and need to dress to impress" are so nuanced that algorithms cannot adequately address them. But the stylist is able to truly understand the importance of these contextual comments which is why humans cannot be entirely replaced by AI. People are great at taking the context into account, making subjective judgments and interacting with clients in a personal way that technology cannot.

The Perks Of Technology

Algorithms help to remove personal style biases so that stylists don't get distracted by the item that matches their own personal taste, and instead focus on the items that are right for the client. They enable personalization at scale and also improve over time, all of which boosts efficiency

The Hidden Gem

Management's discussion of moving to a vendor-managed inventory model, which is used by some of the largest retail companies to operate their world-class supply chains, could help Stitch Fix capture more market share and strengthen its profitability.

Accelerated Growth

Stitch Fix has relied on selling merchandise through a wholesale model, but this has limited its assortment, causing customers to look elsewhere. A vendor-managed system basically puts inventory management on autopilot, resulting in a faster supply chain and better availability for in-demand items, helping the company have the right product at the right time. It will help the company tackle the growing online apparel market that is now worth $127 billion. Moving to a multi-inventory model will enable the company over time to meaningfully expand selection and attract more clients – driving higher demand and accelerating growth.

Improve Profit Margins

Effective inventory management is vital to protecting margins in a competitive retail industry, but it involves delicate balancing. Too much inventory can result in discounted merchandise and therefore harm profitability whereas no inventory equates to lost customers. A vendor-managed model is particularly powerful for a tech business whose entire strategy relies on collecting data from customers about their preferences to deliver a personalized shopping experience. Applying its data-driven algorithms to an automated inventory system should prove to be a very effective combination.

Laying The Groundwork For More Growth

Despite a weak quarter with revenue and adjusted revenue falling short of expectations due to COVID-related disruptions, the shift in the company's inventory strategy is a positive sign for the future. Stitch Fix's revenues in FY20 were $1.7 billion, and it had 3.5 million active clients made of U.S. and U.K. customers, and it is getting ready to broaden selection and fasten restock times to attract even more. Stitch Fix is one of the more interesting and faster-growing retailers of the last decade. The ‘sweatpandemic' that no one saw coming knocked it a bit of its game, that's all.

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