Why You Should Pay Attention To Stitch Fix Freestyle

The value proposition behind Point correction (NASDAQ: SFIX) has always been simple. The company aims to revolutionize the way we shop for clothing by using data science to optimize selection for style, fit and budget.

Changing something as personal as shopping for clothes isn’t easy, but Stitch Fix has taken a big step forward in this quest with the recent launch of Stitch Fix Freestyle, an experience that empowers any customer, even again, to shop directly on the site. from a selection of clothes chosen just for them. Historically, the company sold clothing only through Stationary, or boxes of five items sent directly to customers, who then keep what they like and send the rest back. This model has helped the company reach over $ 2 billion in annual revenue, but there are limits to this sales channel. It is only appealing to customers who want clothing selected for them, ignoring the large addressable market of buyers who prefer to shop on their own, as well as customers who may prefer to simply purchase one item at a time according to their needs. .

Stitch Fix is ​​the leader in custom styling, but that market is still small, as shown by its $ 2 billion in annual revenue. With the launch of Freestyle, the company expands its target market to $ 127 billion, or the total online sales of clothing, footwear and accessories in 2020 in the US and UK (where it operates).

The expansion of the addressable market for Stitch Fix is ​​Freestyle’s most obvious benefit, but it offers a number of other benefits to the business.

Image source: Stitch Fix.

It’s great for brand partnerships

Stitch Fix was already popular among many of the brands it works with as it represents a new and growing channel at full price. The traditional Fix model also offered a way to introduce customers to new brands. But that didn’t show off the brands themselves. Freestyle changes that.

As management explained during the call for results, Freestyle allows customers to directly purchase the brands they love, including Madewell, Rag & Bone, North Face, Vans, Levis and DKNY, with the benefit Stitch Fix algorithms to help with fit and selection. It also has brand name stores where customers can find items from their favorite brands, and gives the company a way to advertise directly to customers who can search for a specific garment like jeans or dresses through product listing ads that showcase a unique branded item. The company has just started experimenting with announcements for product listings, which will open up a new customer acquisition channel that was not available through the patches.

The new offering will also help the company tap into clothing categories that have been underserved by the Fix model, such as dresses, which are more amenable to one-time purchases rather than Fix’s wardrobe model.

It increases the frequency of purchases

Stitch Fix closely tracks average revenue per user as one of its key metrics, and this customer spend metric has grown since it started offering Freestyle to existing customers, reaching $ 505 in the last quarter – the first time it was over $ 500. This is a sign that Freestyle is encouraging higher overall spending on the platform.

While some investors seem to think the new offering will cannibalize Landline sales, the opposite appears to be true, and the use cases are often complementary. A customer who regularly receives patches may want to supplement these with items from Freestyle, especially when they are looking for something in particular like a dress, handbag, or pair of shoes. Already nearly 30% of its female customers have made purchases on Freestyle.

Freestyle also increases customer engagement. If you are a customer who regularly receives patches, you previously had no reason to go to the Stitch Fix site. Freestyle, on the other hand, updates selections multiple times a day based on available inventory, encouraging customers to check in frequently, a smart way to get engagement from those who like to shop for. themselves.

It opens up a world of options

Stitch Fix has focused on apparel throughout its history, and the company still has a long way to go to realize its potential in this market. But Freestyle opens up the company’s data science model to adjacent categories like cosmetics, jewelry, and even housewares. It’s easy to see how such a recommendation engine might work for similar products, as Stitch Fix already knows things about you like your style preferences, fit, and budget.

While the company has not directly commented on this possibility, if Freestyle is successful in selling clothes, the platform could attract cosmetics companies and others, who could even allow these algorithms if Stitch Fix does not wish to sell directly. these products.

Basically, Freestyle makes Stitch Fix a very different business and gives it opportunities that it wouldn’t have with the Fix model alone. These include permission to use other shipping methods that may be more efficient, such as drop shipping (as it does not need to ship five items from a warehouse) and the ability to sell. excess items in customs clearance, although this is not the responsibility of the company. to concentrate.

Stitch Fix’s forecast for the current year was modest, calling for revenue growth of at least 15%, compared to 23% growth in fiscal 2021. But the company is still early in the game. awareness of Freestyle. He is stepping up marketing around the launch, but sees Freestyle as a long-term growth engine that grows the business and the addressable market in different ways.

The 15% growth forecast is not enough to get investors excited, but it could prove to be prudent, as management noted that spending on Freestyle more than doubled last year. We’ll find out more when Stitch Fix releases its first quarter earnings report in December, which will include the first results of Freestyle’s expansion to new customers. Strong revenue growth in the quarter thanks to the disruptive clothing inventory would be a very promising sign for the potential of the new platform.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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