The Pandemic Has Changed Fashion Retail Forever

This year's International Women's Day coincided with the anniversary of the coronavirus putting the whole world on pause. It was one of the most turbulent 12-month periods in recent history that completely changed businesses and lives. In addition, it has also been one of the most disruptive years fashion retail has ever faced. Although it seemed that the online personal styling service Stitch Fix Inc SFIX had what it takes to defy the odds, it ended up with a quarterly loss and softening outlook. It missed analysts' revenue expectations as shipping delays and lower customer spend ate into sales. What is most troubling is that new trends such as home offices became the norm in a new normalcy that is still in the making.

Stitch Fix's Fiscal Second-Quarter Results

For the quarter that ended on January 31^st, active clients spent 7% less than the same time a year ago. On Monday, Stitch Fix reported a narrower-than-expected loss of $21 million, or 20 cents per share. Last year, it made a profit of $11.4 million, or 11 cents per share. Net sales expanded 12% to $504.1 million but still came short of the expected $512.2 million. Shipping delays over the holiday season resulted in backlogs and as a result, the company couldn't record revenue for all boxes shipped during the quarter.

What was a bump in the road was the fact that consumers shifted their spending from themselves to buying gifts for others during the holiday season and this trend resulted in weaker sales. However, the company still had its strongest January on record. It added 110,000 new active clients during the quarter with the total client base amounting to 3.9 million. During the first half of fiscal 2021, it added more active clients than it did for all of the previous fiscal year.

A Unique Business Model

How the US retailer and online clothing styling works is that customers fill in a questionnaire detailing size, style aspirations, the parts of their body they enjoy showing off, and how much they want to spend. Then the magic happens as algorithms use this information to filter the company's stock, with stylists refining the final selection. The client only pays for the clothes they keep and a symbolic styling fee.

According to its CEO, Katrina Lake, the value of Stitch Fix is that the stylists and algorithms "help surface" items among "labels that you would never think would have anything for you." The business model trades on our obsession with busy-ness, as well as choice paralysis. The core customer is busy working but wants to look polished, enjoys fashion but does not have the time to go to boutiques.

According to the CEO who has no fashion training but still keeps in touch by styling five customers a week, jeans are key to customer loyalty because if you can get somebody a pair of jeans that fits them well, they're amazed. She did start the business while doing an MBA at Harvard Business School but, in a COVID world that questioned everything we knew, is this enough?

Forecast

The subscription styling service lowered its revenue forecast for both the undergoing quarter and the whole fiscal year due to ongoing uncertainty revolving around the pandemic and longer purchase cycles due to delivery issues. For the fiscal third quarter, net sales are expected to be between $505 and $515 million, representing growth of 36% to 39%, and an adjusted loss (negative EBITDA) in the range between $5 million to $9 million. For the full fiscal year 2021, the company expects revenue to grow 18% to 20%, down from its prior outlook of 20% to 25%, which is less than Wall Street's 22.6% forecast. The reality is that customers are spending less on average as active clients spent $467 on average, which is 7% less compared to the same quarter last year.

Retail Is In A Different Place

During the early days of the pandemic, it became obvious that the retail sector is in for long-lasting changes. Back in May, Marks & Spencer's CEO Steve Rowe stated that even though some customer habits will return to normal, others have changed forever. Store closures have forced shoppers to become digital consumers, leading to an explosion in home delivery and curb pickup. The rise in online sales has forced fashion retailers to truly see the costs of ecommerce, while also using technology to connect with shoppers in new ways. They needed to find ways to maintain social distancing in warehouses and spread the work over 24 hours, resulting in lessons about working efficiently. Although shoppers flocked back to stores when prior lockdowns were eased, they need to feel safe. There is a new emphasis on storytelling as companies need that ability to pull in consumers even from a virtual window.

On the other hand, travel restrictions have actually encouraged more regular contact with suppliers and closer collaboration through digital technologies to handle diverse tasks. In many cases, the result has been a more focused, more frequent, and faster decision-making. Retailers are still working out the best way of going forward but overall it is unlikely that retail, both in e-commerce and physical stores, will function in the same way as it did before the pandemic. One year on from the first lockdown, only one thing is certain: fashion retail is in a very different place.

Outlook

As for Stitch Fix, the problem it is trying to solve is still there. A busy working woman still wants to look good, and having kids makes it even more challenging to find the time to do that. She might need a different outfit if she's going to work from home more but dressing up is making an artistic statement that makes us feel more confident and boosts our mood – and we all still need that, probably more than ever.

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