Retailer must raise awareness of new Freestyle option
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The Stitch Fix logo on a smartphone arranged in Hastings-on-Hudson, New York, U.S., on Saturday, June 5, 2021. Stitch Fix Inc. plans to publish its June 7 earnings.
Bloomberg | Bloomberg | Getty Images
Now that Stitch Fix has debuted a new way for shoppers to buy clothes, the online styling service must use the coming year to market it to the masses.
“It it will take time for consumers to know that it’s out there,” said Chief Executive Elizabeth Spaulding in an interview Wednesday with CNBC’s Sara Eisen.
Stitch Fix is well-known for its subscription service, where customers receive hand-picked bundles with apparel and accessories. AI from the company guides selections. Stitch Fix now offers a direct-buy option called “Freestyle”
Spaulding explained that they will launch many new features and more brands. We want to allow ourselves the time necessary to make the big change to become the place for personal shopping and styling.
Stitch Fix stock closed Wednesday higher than 15% at $41.01, after falling almost 30% over the past year.
Investors rallied behind Stitch Fix’s upbeat fiscal fourth-quarter results, released after market close Tuesday. Many are looking forward to the future of Stitch Fix, with Spaulding leading it in a new direction that could open up more market opportunities.
Spaulding indicated that the company’s future plans will be to grow its customer base. To buy individual items of clothing or shoes, customers used to need to subscribe to Stitch Fix. The public can now buy direct from Stitch Fix.
Spaulding stated that Stitch Fix must also invest in “Freestyle” advertising to appeal to an even wider audience than the one it has previously attracted.
It hopes that direct-buys will increase its long-term profitability. According to the company, “Freestyle” has already increased Stitch Fix’s average client spending. This metric reached $500 in the most recent quarter.
Stitch Fix has nearly 4.2million active customers. These are clients who ordered “Fix” subscriptions or purchased an item from their website within the 52 week period ending on the last day of quarter.
A ‘meaningful test’ ahead
Still, most analysts remain cautious. Spaulding only 100 days into her new role as CEO. After replacing Katrina Lake as founder, Spaulding has already begun to steer the company away form a subscription-based model.
In a research note, Wells Fargo analyst Ike Bouchow stated that Stitch Fix achieved a higher-than-expected fourth quarter despite low expectations. He said that the company does not appear to be firing on all cylinders.
One reason is that the outlook for online styling services appears weak. Stitch Fix anticipates revenue growth in fiscal 2022 of at least 15% compared to the preceding year. Boruchow points out that this is below its multi-year average increase of more than 20% over the previous year, despite increased marketing investments.
Boruchow stated that online apparel dynamics are stronger than ever.
Boruchow said that Stitch Fix has inventories of about 80% higher than 2019 levels. This could impact profits. Wells Fargo rates Stitch Fix shares as underweight with a target price of $35.
Analysts see potential but are open to seeing signs of improvement in the future.
Cory Carpenter, a JPMorgan analyst, stated that Freestyle, which was highly successful with its existing clients, faces more significant testing in terms of its ability to drive new client acquisition.
There are also red flags. Carpenter stated that Stitch Fix had only gained 58,000 new clients during its most recent three month period. That is the lowest number in six quarters. He anticipates similar but less impressive net increases in the second half of fiscal 2022.
Spaulding disregarded this concern on Wednesday. He said that user growth tends to slow down in the summer months.
She said, “We saw what we expected to see.”
Carpenter stated that JPMorgan must be positive about the stock in order to make it more attractive to investors. The company needs to see a turnaround after years of loss. JPMorgan rates Stitch Fix shares neutrally with a target price of $45
Stitch Fix’s market capitalization is $4.4 billion.
—CNBC’s Michael Bloom contributed to this report.
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