Stitch Fix, Inc. (SFIX) Earnings Call Transcript & Summary

Great. So we'll go ahead and get started. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. Really excited to have with us today, Katrina Lake, Founder and CEO of Stitch Fix. Katrina, I know it's an incredibly busy time of the year for you. So thank you for taking the time to be with us.

Thanks for having me. Happy to be here.

So for investors in the room that are maybe not as familiar with Stitch Fix or maybe know you best as sort of customers of the product, how should they think about what you're building as a company?

Yes. I mean, I think, we're building a next-generation retail kind of platform in a lot of ways. What we are -- the business we're in is we're helping people find what they love. And it's a very simple problem on paper, like it's very -- helping people to find address that fits them, fits their occasion, jeans that fit them. But the reality is, it's a really hard problem to solve when there is near infinite product out there and only a very small subset of that is actually relevant to what people are looking for at any given time. And when you look at the kind of macro environment and how little of apparel is bought online, in the U.S., it is -- still 80% of apparel is bought in stores. And all of us know, that's not because there's no desire to do it online. I think it's because the tools and the -- kind of what's available for people to be able to navigate the world of millions of products is not set up well for apparel. And so with Stitch Fix, we sold $5 billion of clothes sight unseen. In order to do that, we've built this very strong personalization muscle, which means that we have the capability now to understand people, understand products and generate really great accurate recommendations at the intersection of those things that leads to this very high revenue per client, very high kind of engagement revenue model in the apparel world. And so we're really excited about kind of being able to extend that, being able to continue to grow our business, but it's really personalization is the key unique differentiator in our business.

Great. Definitely a lot to dig into there, especially around personalization. But maybe just to start, what's the profile of a typical Stitch Fix customer? Where do they live? What's their income level? How often do they buy from you? How much of their wallet do you think you're getting within apparel?

Yes. It's -- I mean, we're -- the -- part of the amazing part of the potential of this business is that we are delivering a personalized storefront to everybody. And so when -- whether you are engaging with us in the Stitch Fix app and shopping from the app or whether you are getting Fixes in your home, you are getting a subset of products, not the tens of thousands of products that we have, is a very unique subset of products that are uniquely relevant to you. And so what that means is that we're able to serve somebody who's 65 years old and lives in the Midwest as well as we're able to serve somebody who's 22 years old and lives in LA. And so we shared -- I think Q4 we showed some disclosures that showed age breakdowns. And we have a very broad age breakdown of clients that reflects our ability to do that personalized storefront. And it's interesting when we pull our clients and ask them, where else are they shopping? The kind of -- it's the top 10 of apparel retail dollars that are out there. And so what we hear is, we're talking -- we're taking share from department stores, we're -- we have people who even shop at places like Kohl's and Target that we might not have expected. And so it's a pretty broad swath. I would say that people are generally impressed that there is more diversity in our customer base than they expect. Like a lot of times in a newer technology company you would expect a very coastal audience. Like we're very strong on the coast, but we're also very strong kind of across the country. And so we have a very democratic client base and one that -- today, we have 3.5 million clients, and there's still a lot more room to grow.

Yes. So in the last couple of years we've seen a lot of development for the company. You've launched Kids. You've launched the U.K. This year, you also launched direct buying, which moved you significantly beyond sort of the single product Stitch model or a Fix model. How do these fit into your broader strategy for the company?

Yes, I think -- I mean, it's -- we've had a big evolution, and I see it as kind of 2 dimensions of growth and expansion. And one is really we were set up initially with Women's. But clearly, what we learned was like these capabilities that we've built, we're also going to be able to serve Men and also going to be able to serve Kids, so we could serve a whole household. And so that was kind of one obvious way that we could kind of extend the foundation or possibility for us. And then the U.K. was really just about kind of internationalizing the business and getting a toe in the water internationally. And then now when you think about things like direct-buy, what we're really trying to do is to be able to increase the potential both on wallet opportunity and also on the client side of being able to have a more diverse set of ways that people can engage with personalization. I think we know that the capability that we've built is really strong, and it's been really strong and supporting this kind of stylist-selected 5-in-a-box business. And what we're realizing is that like there's actually more potential to that. And so being able to allow people to engage with us in between Fixes -- buy things in between Fixes, that has been a huge engagement and wallet share opportunity. And over time, I think being able to allow people to engage with the benefit of a personalized apparel retail world, but not have to feel committed to a stylist-selected Fix is something that we think will actually open up a lot of possibility for us. So I think we now feel like we have this great foundation of over $400 billion of opportunity. And to be able to make the most of that, we really want to make sure that we have the right kind of diverse set of ways that people can engage, so that the way that people engage with Stitch Fix can be just as personalized as a service.

Yes. So to dig into direct-buy a little bit more for people in the room who maybe aren't as familiar with it, what is it as a product?

So today -- so historically, when I say we've sold $5 billion of clothes sight unseen, that is all in what I would call kind of the Fixes business where people are signing up, letting us know what their size and style preferences, what they're looking for. We will have a stylist-selected set of things sent to their home for them to try on at home. They haven't picked any of it. They don't see any of it in advance. Like it is really like $5 billion of clothes sight unseen. With direct-buy, what we're actually doing is we're exposing that product to clients, and so you're able to see recommendations in between your Fixes, as an example. So today, we have a part in the app and on the website where you're actually able to see looks that are styled for you that you can actually click and buy, even if you -- and have it shipped to you outside of Fix. You can also buy more colors and the things that you like. And so what this kind of allows us to do is to be able to -- there may be some people who kind of like enjoy that browsing and searching experience and that we can actually allow them to be able to engage with us in a way that suits their needs better. So today, I would say that -- I mean it's a little bit not totally optimized in the app. I think one thing about Stitch Fix is that we call it launch and learn. Like we would like to put things out in the world and then learn from them and then figure out, like, how people are engaging with this, how this is going to fit into their lives and then how do we kind of evolve that product. And so we're definitely more in the launch phase and kind of starting to learn, and we'll evolve that product. And so I think it's great. And it's delivering a lot. We're super excited about it. But at the same time, we definitely recognize that it's not perfect today. But I think that there's a lot of potential to marry these 2 worlds, recognizing that there's going to be some products where a style-selected box of things to try on at home. For example, if you want new jeans or you want new clothes for work, like there's going to be a lot of examples of kind of instances and also customer groups that are going to prefer that. But that this actually allows us to tap into potentially a new customer and also a new set of use cases, which is really that use case around like, I see it, I love it, and I need to have it and then being able to serve that -- kind of that additional wallet opportunity.

Yes. I realize it's still early, but what have you learned from it so far?

So I think -- I mean, some of the more interesting things so far are -- so far, it looks very incremental. And so we had a little bit of like how much of this is going to be kind of cannibalizing dollars that they would have spent in Fixes. And we're still -- to be clear, like we're still -- we're a few months into this. And so we're still kind of in the middle of the A/B test. But we -- like there's definitely incremental. It's definitely incremental dollars that we are getting from a wallet perspective. And so that was very positive. We also see -- and we also see some categories are performing better in the direct-buy world than they are in our Fixes. And so as examples, something like handbags or shoes. Like those are product categories where if you get a pair of shoes in your Fix and you're not really on the market for that at the moment, even if it was a good fit for you and your style and your price, even if everything worked about it, if you weren't really looking for that at the moment, you may not convert on that. And handbags are similar, where it's like you're kind of on the market or you're not on the market. And so for some of those product categories where there is maybe a more temporal nature of kind of what people are looking for, the surprise of the Fix might actually might not match the kind of purchase propensity. And so that part has been interesting, too, to really see like, okay, like, these are actually parts of the wallet opportunity that we weren't addressing very well in a purely Fix world, and that we're actually able to complete more of that -- more of his or her closet through this direct world.

Yes. And what do you see in terms of its -- direct-buy's ability over time to potentially kind of reengage with customers that have maybe lapsed off of them?

Yes. That's a good question and one that we get a lot. I mean candidly, right now, the product is really intended for -- right now, the product is really only for people who are getting Fixes today. And I would say the product is -- it's oriented. The Shop Your Looks product, as an example, is oriented around clothes that you bought. And so it's something that you bought a long time ago that you may -- there's a temporal part of that, that makes it so that it's not as perfect, I think, for the reengagement opportunity. But what I would say is, I think, being able to have a personalized direct-buy experience, the one today that centered around items from your clothes -- from your closet that were bought from us, like that, that element may not be the right tool for reengagement. But I think the opportunity to showcase personalized products that somebody can click and buy is really powerful. And so I think we believe that there is definitely a big opportunity with reengagement with direct-buy. I don't know that today's product is set up perfectly for that, but we are actively excited about it.

Yes, that's great. Probably related to that, you've seen trailing 12-month revenue per active customer accelerate 6 quarters in a row now. What is it that is that's contributing to that? And when you think about how you're driving growth through spend per customer versus customer growth, which you're also seeing, how do you want to weight those 2 things?

I mean they're both important. We need to be delivering more clients. We need to be bringing more clients in. And then we also need -- and I love that we've been able to drive higher revenue per client. The revenue per client, I think, is especially -- it's especially -- I'm especially impressed, pleased, excited about it just because behind that, there's actually Men's and Kids, which are dilutive to Women's. And so as we've grown into those new businesses over the last 6 quarters, like there's actually a headwind on that, and we still have been able to deliver better revenue per client over the last 6 quarters. And that's really the result of better algorithms, better buying, better targeting on the marketing side of being able to acquire the right clients, so we're going to be able to show success with. And in Q4, we showed some disclosures around, as an example, we think about algorithms and those helping us to be able to generate better recommendations that have better conversions. And we showed that, that not only our clients' conversion is improving, so people are keeping more things in their Fixes. Of course, as they get to know -- as they get to use the service, so they'll be buying a higher percentage of the things in Fix 3 versus Fix 1. But we also show that in 2019, those clients are performing better, buying more things in their Fixes than 2018. And so this is really kind of the cumulative effect of really being able to understand the people, the product and being able to drive better, more powerful, more accurate recommendations. And all of that ends up materializing in this great revenue per client growth. But we're very focused on both. We know that both are very important. And I think for us to be able to achieve this 20% to 25% growth long term for many quarters, as we plan to, we need to be driving both.

Yes. So you've actually been very consistent in targeting that 20% to 25% growth. Why is that the right number for the company? And over time, how do you plan to approach sort of reinvesting the profits of the company into either better margins or maybe potentially driving faster growth?

Yes. I mean, I think you touched on 2 things, I think, that are very unique about our story relative to others. And the first is that we do have this targeted ideal growth rate of 20% to 25%. We're not maximizing kind of -- we're not like spending to LTV, like we actually shared that our -- in the Q4 disclosures, we shared that we're getting paid back on those within 12 months in our marketing side. And so we're not spending to an irrational LTV. We're not maximizing growth at all costs. And we are targeting this range of growth that, for us, feels like the right level of a bunch of things. I think one is it's risk, just see we're buying inventory. We are a -- we're buying at wholesale or selling at retail. And so we have inventory on our books, and we turn that inventory very fast. We're turning it over 6 times a year. But that there is a real cost and risk to that. And then also just the operational capabilities. And so in our -- we have stylists. We have with thousands of employees. We have 7 distribution centers across the country. And so we need to be able to be operationally growing. We're doing over $1.5 billion in revenue this year. Like that's a lot of incremental dollars when you're growing at 20% to 25% year-over-year in units and people. And so there's an operational component of our growth as well. And so we felt like 20% to 25% is a space that we feel really comfortable and confident and feel like we can deliver great results and then also deliver a great client experience. But it is admittedly a number that I think -- that we choose. Like we have control over our own growth, we have control over our destiny and that's kind of the choice that we've made. And the other piece, I think, is on profitability. We've been profitable since 2014, I think. Looking at David. Yes, 2014. And so we've had a great benefit of being able to control our own destiny and choose what we want to reinvest in. And so something like the U.K. is an investment. And we've been able to reinvest those dollars and to find new opportunities for growth, and that's been a great, I think, benefit of being able to have that control and to be able to feel like we can be thoughtfully making the right decisions for our future.

Yes. So you touched on the operational side of things, and that's obviously been a big contributor to the profitability and some of the margin leverage that you've seen. What has driven those more operational efficiencies? What's contributed to that?

Yes, we've had -- I mean, we've had a lot. We've had operational efficiencies in -- I mean, we've seen -- I mean, I guess, most of this will be in the warehouses, but in gross margin as well where we've been able to -- the better we are at buying the right product and getting it to the right person, the less waste we have in our system. We're able to drive better gross margins. That's been a part of our story. On the OP side, we've done a lot in the warehouse world of driving operational efficiency. A lot of this is -- this is a business that got to $1 billion in 6 years, 7 years, something like that. And so there's probably a lot of like opportunities literally on the floor where Mike, who had been CEO of Walmart.com kind of looked at our very manual operations and saw so much opportunity. And so we've driven a lot of leverage on the OP side in the last 3 or 4 years. And we actually still have a lot to go. And so you look at our -- I can't -- have you come to your warehouse?

Yes.

Yes. It's -- you can look at the warehouse, and I'm sure you could see -- like you've been to other warehouses. You could see there's still a lot of opportunity. There's a lot of automation opportunity. There's a lot of space efficiency opportunity. There is -- I would say, we're actually still in the early days in terms of like how we can be deploying capital against kind of greater efficiency in our physical spaces. And then stylists also, we've driven a little bit of leverage on the stylists side. It hasn't been a huge area of focus. But definitely, as we think about things like direct-buy, for example, which currently don't have a lot of engagement from a stylist. We think about things like we've done a lot of internal tooling that actually helps the stylists to be able to be more accurate. And so there's probably some opportunity there. It hasn't been historically a big area of focus for us. But I think we're still in the early days of -- we've captured a lot of that leverage, but we also still have a lot more to go.