The retailer must promote the new Freestyle option
The Stitch Fix logo on a smartphone displayed in Hastings-on-Hudson, New York, United States on Saturday, June 5, 2021. Stitch Fix Inc. is expected to post earnings on June 7.
Tiffany Hagler Gear | Bloomberg | Getty Images
Now that Stitch Fix has launched a new way for shoppers to buy clothes, the online styling department must use the coming year to market it to the masses.
“It will take time for consumers to know that it exists,” CEO Elizabeth Spaulding said in an interview Wednesday with CNBC’s Sara Eisen.
Stitch Fix is known for its subscription offering, which sends customers bundles of handpicked clothing and accessories. The selections are guided by the company’s AI. Now, Stitch Fix is extending a direct purchase option, known as “Freestyle”.
“We will be launching a lot of new features, more brands and custom stores,” Spaulding said. “We want to give ourselves the time to really make this big transition to becoming the destination for personalized shopping and style.”
Stitch Fix stock closed on Wednesday up more than 15%, at $ 41.01, after falling nearly 30% year-to-date.
Investors have rallied around Stitch Fix’s strong fourth quarter financial results released after the market closed on Tuesday. But many are also looking to the future potential of the business, as Spaulding directs Stitch Fix in a new direction with a potentially bigger market opportunity.
Spaulding said she expects the changes to help the company grow its addressable market. Previously, customers had to subscribe to Stitch Fix to purchase clothes or shoes from its website. From now on, direct purchase is accessible to the public.
But Spaulding also said that Stitch Fix will need to invest heavily in “Freestyle” advertising to a larger audience who might have resisted listing in the past.
The hope is that direct purchase sales will increase its profitability in the long run. The company said “Freestyle” is already increasing the amount active Stitch Fix customers spend on average. In the last quarter, this metric surpassed $ 500 for the first time.
Stitch Fix now has nearly 4.2 million active customers, who are people who have either ordered a “Fix” subscription or purchased an item directly from their website in the 52 weeks leading up to the last day of the quarter.
A “significant test” to come
Still, most analysts remain cautious. Spaulding has less than 100 days in his role as CEO. And after taking over from founder Katrina Lake on August 1, she is already moving the company away from a subscription-based model.
Against relatively low expectations, Stitch Fix had a better-than-expected fiscal fourth quarter, Wells Fargo analyst Ike Boruchow said in a research note. But the company doesn’t appear to be “pulling all the cylinders,” he said.
On the one hand, the outlook for the online styling service is poor. Stitch Fix forecasts revenue growth in fiscal 2022, its current fiscal year, of at least 15% over the prior fiscal year. Boruchow notes that this is below the company’s multi-year average of more than 20% year-over-year increase, despite increased investment in marketing.
“The online clothing dynamic has been stronger than that,” Boruchow said.
Stitch Fix stocks are also around 80% above 2019 levels, which could end up weighing on earnings, he said. Wells Fargo is underweight Stitch Fix stocks, with a price target of $ 35.
Some analysts see potential, but want to look for signs of progress in the coming quarters.
“We believe that ‘Freestyle’, which has been very successful with existing customers to date, now faces a more significant test in its ability to successfully lead new customer acquisition,” said the analyst. from JPMorgan, Cory Carpenter, in a research note.
And there are other red flags. Carpenter noted that Stitch Fix only added a network of 58,000 active customers in its last three-month period, the lowest in six quarters. He expects a similar and disappointing level of net additions in the first half of fiscal 2022.
Spaulding dismissed this concern on Wednesday, saying the summer months tend to be slower for user growth.
“We kind of saw exactly what we thought we were seeing,” she said.
For JPMorgan to be more positive on the stock, Carpenter said, the company’s earnings must “turn around in a sustainable way after several years of squeezing.” JPMorgan has a neutral rating on Stitch Fix stocks, with a price target of $ 45.
Stitch Fix has a market value of $ 4.4 billion.
– CNBC Michael bloom contributed to this report.