This company combines the love of clothes, data science, and e-commerce into an easy alternative to traditional shops, so here’s how it makes money.
Nov. 24, 2020
Stitch Fix (NASDAQ: SFIX) is a clothing and data science company with strong leadership. For the most part, it has been profitable since 2014, however, in the last fiscal year Stitch Fix did report a loss. Founded in 2011, the company utilizes the expertise of neuroscientists, mathematicians, as well as statisticians to run its intelligent shopping platform. The CEO Katrina Lake took Stitch Fix public in 2017 as the first female-led IPO in over a year.
Since then, it has grown into a strong and stable business that provides its clients with personalized recommendations and high-quality clothes to buy without having to go to a brick-and-mortar store. During the pandemic, Stitch Fix has felt the strain like a lot of companies as it finished the fiscal year with a net loss of $67.1 million. Despite that, net revenue for the fiscal year grew 11% year-over-year (YoY). With this in mind, we decided to look at how Stitch Fix makes its money.
1. Styling fees
For users of Stitch Fix the costs are simple. With each order, there is a $20 styling fee which, if a customer decides to keep any of the items that are sent, is deducted from the total price of the order itself. For the fiscal year, 2020, Stitch Fix reported that it increased its active user base 9% YoY to 3.5 million. If each user only orders at least one ‘Fix’ then the $20 styling fee guarantees $70 million in revenue at the absolute minimum.
The revenue for each client also includes the income generated from the sales of the clothes themselves. For the most recent quarter, the net revenue per client was $486, down 2.4% from the previous quarter. However, this is a 2% increase YoY on an adjusted basis.
Stitch Fix only opens up its subscription service Style Pass for select users who have ordered over a certain number of Fixes. It costs $49 per year and it guarantees each subscriber unlimited Fixes; waiving the styling fee. In addition, the subscription provides free shipping and free postage for any returns.
A recent report by Ernest Research found that Style Pass subscribers pay around 15% more overall for their clothing, and retention rates for this group remain between 50-70% which is surprisingly good for what is essentially a luxury, personalized shopping service.
This is where the majority of Stitch Fix’s revenue comes from. For this company, however, one major facet of the business is that data and algorithms keep the company moving and keep customers interested. At the start of 2019, the company employed over 100 data scientists who work on a broad scale of projects, from rebuy algorithms to trend predictions, which helps the company tailor each user’s shopping experience and take style preferences into consideration.
The recommendation feature is particularly important as it continually brings users back to Stitch Fix’s platform. In fact, around 80% of all active users have used this feature. What works so well about the algorithm is that when a Fix is delivered, the user gives feedback, and the ticket price rises each time as it really hones in on individual customer preference. Currently, the average order costs $55. Net revenue for the most recent quarter was $443 million and for the fiscal year it was $1.7 billion, both of which were up 11%
What’s next for the business?
Stitch Fix is e-commerce and data science tied up in a neat bundle. For this reason, as well as the rapid global switch to e-commerce over the last year, Stitch Fix should be on track to profit from increased interest in its service. The company has also stated that, looking towards the future, it is furthering its efforts to expand in other markets, such as in the United Kingdom, and gain a foothold in other countries.
This company is a great alternative to tediously busy shopping mall trips at the weekend. Therefore, in a post-pandemic, e-commerce oriented world, investors shouldn’t dismiss this stock too fast, particularly when considering the clever data science aspect that really gives this company its edge.
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