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

Hi, I'm Heath Terry. I cover the Internet sector for Goldman Sachs. Really excited to have with us today, Katrina Lake, Founder and Chief Executive Officer at Stitch Fix. Katrina, thanks for taking the time to join us.

Thank you for having me.

Yes. So for investors watching that may not be as familiar with Stitch Fix or know you maybe as a customer, what's the right way for them to think about what it is that you're building and how Stitch Fix is different from other online clothing retail companies?

Yes. What we're really building is like what I believe to be the future of how people are going to buy apparel in 10, 20 years. And as all of us know, all of us have bought clothes at some point. Like the experiences of buying apparel today are deeply broken. Like you are looking at a scenario where you are walking into a store, you are flipping through racks and racks of things which are not relevant to you. They're not your size. There's thousands of pairs of jeans on this planet. There's a subset of those that are going to be awesome for you. And what's even the probability that you walk into a store and flip through hundreds of jeans and find ones that are great for you? That's an obviously broken experience, and e-commerce really isn't better. I think the idea of searching and filtering your way to finding the perfect pair of jeans is -- I mean that's a pipe dream. Like that's a crazy way to shop for jeans online. And so there has to be a paradigm shift in the way that we think about how do we actually kind of match make between people and products. And so at Stitch Fix, we do exactly that. So we -- most of our kind of most of our history to date has really been around this notion of Fixes where people sign up. They let us know what they're looking for, what they like, what they don't like. Based on that, we use a combination of algorithms and human stylists to -- for people to be able to try things on at home, send back what they don't like, keep what they like. We have sold $6 billion of clothes, sight unseen that way. And what that means is that we've built this amazing personalization muscle. And so when you're trying things on and you let us know "I love this, but I have something just like it;" "I like this, it was too big," whatever the feedback is, that helps us to get to know you, and it also helps us to know the pieces -- the garment. It helps us to get to know people in general. And so that personalization capability has really been kind of what we've created over the last 10 years. And now we're really focused on like how can we actually make the most of that. And so Fixes are great for one modality of shopping. The reality is there's lots of other ways that people want to shop. The market opportunity for a more personalized way to buy apparel, I really think is all of it. Like every single experience that we have buying apparel will be better served if you were only seeing the things that were relevant to you and personalized to you. So we're still super early on a journey of achieving that kind of goal and dream, but I do think that now with the billions of dollars of sold of -- billions of dollars of apparel we've sold through Fixes, and now as we're starting to look at direct buy and really innovating on our platform, that we're starting to chip away at kind of what that can look like.

Yes. So what's the profile of a typical Stitch Fix customer?

Yes, it's a great -- I mean, first and foremost, I have to say, because it's a personalized model, the premise really is that we serve a wide range of price points. We do men, we do plus size, we do kids. We do women's, of course, like we do a wide range of aesthetics. But from a psychographic perspective, it's kind of interesting, I think, the notion of -- and I'll talk about Fixes first and then about direct buy. But with Fixes, you're entrusting a lot in our process and the stylist. And so Fixes is a little bit more of like a "sit back and do it for me" experience. What's interesting is that more -- we've done surveys on this and something like more than half of the people who live in the United States don't -- like they don't like shopping. And I think many of us can probably empathize with that, maybe we at least know people who are like that. And what's interesting is like there's no other kind of apparel commerce play out there that actually caters to that customer. Like the premise of apparel shopping is like, hey, you want to see our new arrivals; hey, you want to be inspired by this, you want to try all these things on? Half of the people in this country don't even want to do those things? And so this notion of like sit back and do this for me and help me is really relevant to more than half of the United States, and that's really what the Fixes offering, from a psychographic perspective, serves, and we can -- within that, we can serve all kinds of different profiles and price points and categories. And then what I think -- what's really exciting is really thinking about direct buy and how direct buy can start to add to that. And so the direct buy can really address more people who want to have more say in what they're getting, people who -- from an occasion perspective, like if you want something really specific at one point in time, Fixes may not be the best modality for that, but direct buy can get there. And so our belief is that personalization really should be able to serve all of the needs out there, all of the different ways that you want to shop, and we're just starting to get there in that. But I think that today, that psychographic perspective of, like, if you hate shopping, Fixes are a great way. But over time, we're starting to show that we actually can address more and more of those use cases and more and more of those psychographics.

And so when you think about what you're addressing, is there a sense of the share of your customers' wallet that you have for apparel? And really curious how direct buy and some of your other initiatives like that are -- might be changing that share.

Yes. What's interesting -- and we haven't updated data on this in a long time, to be clear, so I can't share any specifics. But from a minority percentage, but a minority, but a significant percentage of our clients, like we are the majority of their share of wallet. And that's interesting across a lot of dimensions. It means that we really understand the composition of their closet. And then what's been interesting with direct buy is that we've seen clear incrementality with direct buy. We can see that through kind of our numbers and cohort performance, but we can also see that by a little bit by category penetration. And so we've seen things like shoes and handbags perform a lot better in direct buy than they do in Fixes. And rationally, that kind of makes sense. Like if you're not shopping actively for a handbag, like you may not actually need one. And if you don't need one, you may not want one. And it's similar with shoes. Like you're either looking for a pair of shoes or maybe you're not. And so for those things where the timing really matters and where there's a kind of exact right point in time that you need it, direct buy is a much better modality to serve. And so our goal, of course, is that we actually should be able to increase share of wallet over time with our customers, and revenue per client is a good metric to kind of see how we've been able to do that historically. And as we're getting better at personalization, as we're getting better at getting people to come back and getting people to be excited about shopping, not just through Fixes but direct buy, these are all things that really help us to grow that share of wallet.

So the last year has obviously been incredibly challenging on countless levels. You've had to deal with the challenges in your fulfillment centers and remote working and the massive change in the demand for apparel, as well as the adoption of e-commerce. What have you learned in the period -- over this period? And how is it affecting, or will it affect the way that you strategize and manage Stitch Fix going forward?

We could probably talk about this question for an hour.

Yes, spend the whole day on this, yes.

Oh, where to start? I mean it's been an incredibly challenging year. The silver linings of it really are -- I mean this is -- as an entrepreneur, these time periods where things are changing, the world is shifting beneath you, consumers are changing, they're totally open to trying things in new ways, like that's an incredibly exciting time. If you could set aside the -- all the other emotional challenges we've had. And so just from a business and strategy perspective, I think it's really helped us to accelerate some of the exciting things that we were thinking, that might have been 5 years from now or maybe a couple of years from now, and really invest in those things now and to take advantage of kind of the ground shifting beneath us. While right now, people are buying less clothes this time of year than they did last time -- this time of year last year, for very obvious reasons, we still -- we've been growing share in that. We've been growing our business. We've been growing share during that time period. And so I think it feels like -- it does feel like the things that we've been working on for the last 10 years are the right relevant things that are going to help us now and in the future. And so all of that, I think, is some of the silver lining of what we've seen. On the flip side, like, I mean, one of the things -- like working from home actually is interesting, like our stylists already were working from home. Our engineering team was already largely working from home. And so we were very lucky that we had teams internally that knew how to build cultures in remote environments that we could learn from and kind of our organization getting more remote. Our fulfillment centers, we've been in a mode of investing in our fulfillment centers for a long time. They've been a very important part of the client experience. And this time period has only shown us how important they are and how we need to continue to invest in those fulfillment centers. And so that's probably more of a continuation of strategy. And then around the social justice issues, I think it's interesting when you think about company culture and the time that we all invest in building these great cultures and having people have alignment around what the values of the company are, and there might be times when you wonder, does this really matter to the enterprise value of a company or not? And I can tell you like, what we went through this summer, I was immensely grateful that we had made all of those investments in our culture. And so certainly, the notion of equity is something that's always been really important to Stitch Fix. We have pay equity parity. We've shared that. We have -- we do a lot of practices around market-based pay, making sure that we're equal on that front. And so that was in our DNA already and something that people really understood to be part of our DNA. And because of what we saw this summer, I think it gave us a chance to double down. And so as an example, we launched this Elevate program that really helps to diversify our vendor base. We looked at what are the all different ways of -- all the different forms of power that we have as an organization to create change in the world. The money we spend with our vendors is one of those, and we saw a stunning lack of diversity in that vendor base, and the Elevate program, which provides sponsorship and mentorship to underrepresented designers, that was something that came out of that, that I think, ultimately, is a great thing and something that our team is super excited about and, ultimately, I think, will create change in the world. And so it was undoubtedly the most challenging year of my leadership. But I think, at the same time, we probably learned more than we ever have, and we've built more resilient than we ever had. And the importance of flexibility is another thing. Like it's nearly -- like every day and every week has kind of looked different and crazy this year. And so I think our team has had to really build a lot of muscle around how do we think about being more flexible as an organization and reacting to data quickly. And so in the long run, I think those are probably all good things, but certainly challenging when you're dealing with them all at once.

Sure. No question. And yes, Elevate is such an amazing initiative. It's hopefully something that we'll see a lot of other places or some things like it in a lot of other places. We've touched on direct buy a couple of times now. But for people who maybe aren't as clear on Stitch, on direct buy itself, what is the vision for direct buy? And how has the offering evolved over the last year or so since you started rolling it out?

Yes. So I mean the first 10 years of the company really were the primary vehicle of growth and really still is. There's this notion of Fixes, which we've already talked a little bit about, where you're not getting to choose the items that arrive at your home and where there's no -- there's kind of like little e-commerce UI to it. And so while that is a great way to shop, we also know that there's many people who want to -- who actually enjoy looking at products, who actually enjoy kind of seeing a variety of things and who want to have that instantaneous click and buy and have it come to your home experience. And so with direct buy, what we did was we really took that same personalization capability that we built in Fixes but oriented it around more of this click-and-buy experience. And so we are not -- we still have the same notion of this is personalized. The selections you are seeing are not the selections that your friends or your neighbors or whoever else are seeing. These are really specific to what you're seeing. And so while we probably, at any given time, have tens of thousands of things we could be showing you, we're only showing you a small subset. Could be 20, 30 of those things that we really believe are products that you have a high likelihood of keeping and liking. And so we still use the same personalization. We still use the same notion of curation. But we're allowing you to click and buy, and we've experimented with different formats. And so we've done trending for you, which is really kind of looking at more of the newer things that we're getting in our inventory and the ones that are most relevant for you. We are also looking at -- we've looked at -- we looked at ways to be able to complete your look and so things that you've already bought that you can actually find complementary items to that. And so we've started experimenting with kind of different form factors of what that experience could look like. And I think this really is one of the most exciting things that I've had the privilege of getting to work on because it's one of those initiatives that is both really powerful, and we can see in the data that it's working, and at the same time, like there's still so much opportunity. Like every time I experience it, I'm like, okay, this is cool, but this would be amazing. And so from a product experience perspective, we still have a lot that we can do to improve that experience. And so it's this really kind of exciting green shoot, so to speak, of just like something that we haven't updated and know that this is exciting. And at the same time, it's absolutely not fully materialized yet.

Yes. One of the things that we hear a lot, or at least get in some of the conversations that we have with investors is this perception -- and I know it's not correct, but this perception that direct buy means you end up looking like just a big shopping mall that sells everything within apparel. What role does all of your investments in algorithms and data science and machine learning play within that direct buy model?

Yes. I mean -- and I think the onus on is us to be able to provide better proof points for this because the reality is, it's wildly different. It's radically different. Like in an e-commerce store, in an e-commerce setting, like, first of all, you're seeing all of the inventory. You are seeing millions, hundreds of thousands of things, most of which are completely irrelevant to you. And the notion of like we're only going to show you 20 or 30 things and expect to drive conversion off of that is like a pretty crazy thing. Like if you went to a department store and you said, "Hey, like your homepage can only show 20 items per person," like I mean, these companies would have no business. And so like the personalization actually forces you to really place bets appropriately, and that's definitely part of that curation and personalization. The other place that we haven't shared specifics on it, but when you look at our return rates, like we know it works. Like we are showing you things that are only relevant for you. They're not relevant for others, they're relevant for you. And that drives conversion. It drives product acceptance. It drives people loving it. It drives them to not return it. And so this paradigm of like being able to see things that really are right for you and only you, I think, is something that you don't see others players able to do. And a lot of that has to do with the fact that we've sold $6 billion of clothes, sight unseen. And so like every single garment, like people are sharing with us feedback. We know who it works for. We know its statistical significance that this garment is more likely to work with these cohorts of people than these other ones. And being able to have that rich data allows us to have these really accurate recommendations. I do think one of the product improvements that we can make is to be able to have the end-user experience to get more [ bed early ] that way. I think today, people -- I think there's ways that we can actually demonstrate why it's for you or why we have that confidence, that I think we'll be able to show that a little bit more viscerally to people. But behind the scenes, like we know every single recommendation for each person and garment is unique to that combination. And so that's a very, very different paradigm than the way that you're experiencing e-commerce in other places.

Yes. So beyond that direct buy, what enhancements are you making to the Fix offering to drive greater personalization and improve client retention, wallet share, average spend per customer, the KPIs that matter to you?

Yes. I mean those are exactly the KPIs that we're tracking on a daily, weekly basis. We're constantly running AB-tests. We have shared historically that our index success rate, so the probability that clients are going to keep items, that has gone up steadily, dramatically over time. And all of those things are the -- kind of the aggregation of all of the things that we're doing every day to make our merchandise more relevant, to make our recommendation engines more relevant. And so kind of enhancing that Fix experience is the bread and butter of the vast majority of work that happens at Stitch Fix. Something specific that we've been experimenting with, that has been really fun is Fix Preview. And so this notion of like -- there are times when clients might be intrigued by the idea of Stitch Fix but, at the same time, maybe a little bit skeptical -- what's actually going to come for me, does this personalization actually work, like how are they going to send me jeans that are really going to fit, like -- I think people have a lot of skepticism that like that a Stitch Fix model can actually work for them. When we're only sending them 5 items, then they don't have the choice in that. And so what we've realized is that being able to give people a preview, I think, builds confidence. It also helps us to understand people better during that experience. And so the Fix Preview was something that we actually rolled out in the U.K. originally as a test bed there, and it was very successful there. And so now we're bringing that over here to the U.S. and that's been a very exciting evolution of our service that I think it improves the experience that people are having in Fixes. But it also actually helps with conversion and helps people who might have been on the fence about Stitch Fix to be able to feel like we have more control over that experience.

So as you continue to enhance the Fix offering and expand direct buy, what kind of investments are you making into the inventory and even logistics strategy to support greater demand?

Yes. I mean the logistics element is definitely an area we've -- I mean, candidly focused on a lot in the last 10 years, being pure e-commerce, like that's an area we've had to focus on. And I think as we've seen more and more dollars shift to e-commerce, in general, we know that environment is getting more competitive. And so all the technology that we're using in those warehouses becomes more and more valuable, and so that will certainly continue. The inventory model side, I think, is really interesting. I think our focus right now is we think about what direct buy can do, as we think about decoupling personalization from Fixes and being able to address many more types of clients out there, selection and diversity of selection is super important. And so I think there's an opportunity for inventory models in being more creative in the way that we think about working with our vendors that can actually enhance our selection, that can really provide a better experience for our clients. And so we're still super early in that thinking and that experimentation, but I think it's a really exciting kind of area to be thinking about and certainly has really powerful kind of balance sheet implications over time of like, if there are ways we can increase our selection without actually using our cash to do it, obviously, that generates better outcomes for clients, can generate more revenue without actually tying up cash in the balance sheet. And so for all of those reasons, I think it's a really exciting space to be thinking about, and the team is definitely putting a lot of thought there.

Yes. Logistics was obviously a huge challenge for a lot of e-commerce companies, I mean -- and has been during this entire pandemic, but especially during the fourth quarter. Not asking anything specific about the quarter, of course, but just how you think about sort of the bottlenecks that are developing around logistics.

Yes. I mean, we've always been really fortunate that, like in our model, we have a lot of predictability. And so you talk about kind of the holiday quarter, which is very challenging for a lot of companies where a lot of their volume materialize in the fourth quarter. We are still susceptible to the same labor pressure, to the same shipping pressure that all of these other companies are. But the thing is, we actually -- like we have more control over our volume as our volume is more steady across the year. And so our kind of Q4 is actually our Q2. But during that holiday time period, it's not -- our model is not really giftable. I mean, you can do a gift card, but it's not something where you're buying it urgently in Q4 as a gift for somebody. And it's a time period where people are not spending as much money on themselves. And so, historically, it's been a quarter where we've sat out from a marketing perspective, a fair amount, and that we don't have that same kind of Black Friday rush that I think a lot of other companies have, which is a struggle for them and -- but something that we don't totally have. And so we don't have a lot of these specific things, but like what -- but I think from a bigger picture perspective, like logistics is a super, super important part of our client experience. And we've made a lot of investments, both in technology and in people. And we're really grateful that we made those investments as we went through this kind of challenging time from a labor perspective over last year. But I think we definitely are continuing to look at ways of like how can we continue to invest in our warehouses, how can we make sure that we have -- that we're competitive on the people front, and those certainly continue to be priorities for us.