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

And we are live. Good afternoon, everyone, and welcome to the Truist Securities Technology, Internet & Services Conference 2021. My name is Youssef Squali. I'm the lead Internet analyst at Truist Securities, and it is my pleasure to have Elizabeth Spaulding, President of Stitch Fix. So Elizabeth, welcome, and thank you so much for taking the time to be with us this afternoon.

Thank you so much, Youssef, for having me.

All right. So before we begin, I'm just going to need to read the following disclaimer. I think this will be the last time I go through this today. So this call is arranged by Truist Securities research for use by institutional investors and issuer clients, as defined by FINRA. If you are not an institutional investor or issuer, please disconnect at this time. For required disclosures, please see our website at truistsecurities.com or our equity research library for more detail. So just a quick word on Elizabeth, and then we'll get into Q&A. As President of Stitch Fix, Elizabeth is focused on driving the next phase of the company's growth, including direct buy capabilities and international expansion efforts. 2 big topics we'll be discussing. Prior to Stitch Fix, Elizabeth was Global Head and founder of the digital practice at Bain & Company, where she supported clients in digital transformations. With a particular focus on consumer and tech sectors. So her role at Stitch Fix seems extremely apropos. All right. So let's start at -- or let's just set -- level set the conversation. So you joined Stitch Fix a little over a year ago, I think. Maybe speak to us about the top 2 or 3 reasons that got you to say yes to Katrina Lake, the CEO, and she made you the offer.

Well, first Youssef, I'm so excited to be here. Thank you for having me and happy to be the home stretch of your great event. Yes. Katrina and I just built a great relationship, and it was somewhat serendipitous. As you mentioned, I spent the first 2 decades of my career at Bain & Company, a wonderful place that I considered home for a long time. And in the last sort of 7 to 8 years, I really realized it was kind of an entrepreneur inside of a consulting firm. And on a personal level, I loved what I was doing in terms of building new businesses for Bain. I launched our software practice. I was doing a lot of work on innovation, really at the intersection of consumer technology businesses and traditional consumer businesses. And when I was introduced to Katrina through one of the Board members who is a mutual friend it just kind of made sense. The company is very much ready for its next big chapter of growth. And I felt like I had this unique advantage point. In terms of working with consumer tech businesses and traditional retail businesses, what was really obvious to me that Stitch Fix had built something extraordinary that could become just a truly enormous global business. And the acknowledgment that I had was working with a lot of the traditional players. It's just really not in their DNA to be a data-driven, data science-based company, and it's really, really hard to transform, having worked on many transformation type projects like that in my career. On the flip side, most of the consumer tech players, although they dabble in commerce and building relationships, for the most part, many of those players are content companies or ads businesses. They're not really building the end-to-end supply chain the consumer-facing experience. And I guess, at the core, I just saw that this extraordinary personalization engine could be taken in so many new directions. And I guess the -- perhaps one of the most important points for me personally was just the culture of the business. I think part of the reason I stayed where I was for so long was a truly extraordinary culture of mentorship, sort of a very change oriented mindset and just a value system that I really believed in. And I think that is one of the biggest strategic advantages of Stitch Fix is just an extraordinary culture.

All right. So let me piggyback on this truly enormous business potential. So we put it in numbers for us. So at a high level, how do you look at the TAM for your business? And then probably even as importantly, how has that TAM changed with COVID.

Yes. It's a great question. I mean, if you look at the U.S. alone, the apparel market is around $400 billion. Over the next several years on a global basis, we'll be getting close to $1 trillion market. And it's a very complex choice market. It's not dominated by a few players. And from a consumer standpoint, it takes a lot to find what you want. It's not like consumer electronics where a few big players and the barriers to building are so high. And so I think that creates a very unique opportunity. The other thing is just the opportunity has got a lot bigger, a lot faster. For us. Over the course of COVID, if we look back to February, this time last year, maybe about 25% of apparel was online. It was one of these categories that was really sticky in stores. And part of that is a lot of the category is browse and discovery. You don't know exactly what you want. You're trying to find something that fits you. You're trying to kind of identify your own personal style. And fast forward into COVID is people have been really forced to try new things and move on online and become more technology savvy. We think about 40% of the market is now online, and we believe 50% by 2025 will be online. And we we really feel like we are the right product at the right time in terms of product market fit, we're seeing it in our year-on-year growth numbers. We mentioned in our recent quarter that we saw 50%. year-on-year growth in Q2, we saw 25% in Q1. And it really is this idea that we think the product market fit, the idea of trying on clothes and the comfort of your own home that have been perfectly hand selected for you has never been more resonant. And really, what remains in the shift online, it's not the items you're just replenishing. You know exactly what you want and you're searching for. It's those harder to find things, the things where you're in that more discovery and browse mode, and that's what really characterizes the future for Stitch Fix. And so when you ask like, well, what part of that market, do you want to walk into your own personal store and see things just for you? We think that market opportunity is really all of it, and that's what we're going after.

So about 3 months ago or 4 months ago, we had a conversation, in which we talked about a $30 billion opportunity emerging over the next 18 months or so. Maybe speak to that a little bit.

Yes. I think what we had characterized then was this idea that, if e-commerce for apparel was around 25%, and we're going to see this very rapid shift of around 10 to 15 points move online. That's easily a $30 billion shift that otherwise, in a normal year might have been $5 billion to $10 billion. And so that's the $30 billion we were alluding to. And we really do think it's happening right now. And as apparel spending comes back, I think that number gets even bigger. And so a few of the ways we've looked at it is that, that market size overall, the percentage that's shifting more rapidly to e-commerce, another lens that you might take to look at it is just the extraordinary number of bankruptcies. We saw a lot last summer into the fall. If you look at a lot of those players, I think we're going to continue to see challenges of operating big traditional retail footprints in a world where people just aren't shopping the way that they used to. And we think a lot of the behaviors that we've seen during COVID are going to persist. And so that $30 billion is very much up for grabs and probably a much bigger number as we look towards 2025.

And bringing this to the individual shopper, if you were to look at the -- your typical consumer wallet. Any idea how much do you have of it now of their annual apparel spend and kind of adversely, what's the opportunity there?

Yes. It's a great question. I mean one thing that's really unique about the historic Stitch Fix model, and of course, we're innovating and continuing to evolve it, is that it's been a pretty good-sized share of wallet for a lot of our clients. The majority of our clients, when they sign up, they join on an auto-ship basis, on a recurring basis, they're shopping with us. What gets us excited though now is, as we've seen with the launch of direct buy for existing active styling clients is that's actually adding to that share of wallet. We had mentioned in the recent quarter that we -- as we look at like our 3 and 6 month cohorts of this year relative to last year, we saw an expansion in contribution profit because of that access that they now have to direct buy in addition to our Fix offering. And so we don't think we have all the share of wallet, though, yet of those consumers, partially because what direct buy is opening up is other purchase occasions. We're seeing different product categories and when you're in a little bit more of an intent-based occasion, "Hey, I'm looking for a new pair of athletic footwear, I'm looking for a new pair of joggers." Those are the types of things people tend to be shocking for right now, eventually maybe a fun dress or something for going out. We're beginning to see that open up. That's where direct buy really comes into play, and we're really excited to see that being an incremental opportunity to further build that share of wallet.

Okay. Makes sense. So I want to touch on the competitive landscape just very quickly and then move to the quarter. But on the -- competitively, who do you guys index yourself against? And as you look at the kind of the short to medium term opportunity, where is this market share coming from?

I mean we really believe our model is fundamentally different than the rest of retail. I mean, the way we think about the data that we amass and the personalization that we bring. I mean, in what other situation do you get a box of five items, you don't even know are coming and you, on average, are keeping 2 to 3 of them, like that's a pretty unique experience. And that's powered by our data science capabilities, the unique styling community that is adding value to each of those fixes. And now this notion of a shopping feed that's just for you. Of course, as we think about taking share and who that's coming from, our Women's business has been particularly strong of late, which is exciting, given it's our largest segment. And we've seen tremendous growth in the Plus segment that we think has been highly underserved. A lot of those stores have closed. It's historically not been as well served online. That's a place where we think we're really taking share. We've seen our athleisure and casual wear growth a 50% year-on-year. That's a place where we think we're probably taking share from traditional brick-and-mortar apparel as people are moving those occasions online. So in some ways, I don't know if we consider it exactly our competitive set because we think of our model is so much different. But we definitely think we're taking share from those traditional purchase occasions that might have been in a department store are now very much moving to Stitch Fix.

Right. And so relative to department store, you guys look really more like a tech company, more like a data company. When we were doing due diligence, this was years ago, we're always really floored by the number of data scientists that you guys have. So two -- one, can you maybe speak to your personalization as the ultimate competitive advantage? Where are you in that journey? And two, as you keep adding more and more data, what kind of projects are you guys most excited about right now?

Yes. I mean, this was definitely one of the things that most attracted me to the business was just the power of our data science capabilities and the talent on that team. And then just the models and the approach that we've announced over the last 10 years. I mean that is an advantage that we believe is just a huge moat relative to other competitors. And one of the things that I think is particularly unique is that we're not just using data science to match inventory to an individual client, which is, of course, a big part of our secret sauce that we're only showing things that are going to fit you that are representative of your personal style. We've built with our data science capabilities, a latent style graph that is very powerful based on extracting through computer vision and other characteristics, like what makes style happen and helping consumers do that discovery. But we don't just use data science within that. We use it in the way we manage our supply chain, how we allocate inventory across our distribution centers. We use it in our approach to digital marketing. We have our own internal software tools we've built for that. The tools that are solid to use, it's really woven into the DNA of the business in terms of how we operate really everything. And a big part of -- maybe a few things I'm particularly excited about. I think one is just this mindset of like data flywheels, how can we create things that are highly engaging but also kicking off a tremendous amount of insight. So Style Shuffle is an example we've talked about many times. That just continues to be a very powerful data flyway for us. We've now announced over 7 billion data points. We have users playing with that on a daily basis. It's constantly getting us smarter and smarter about individual preferences, but then being able to abstract that to new customers that joined our platform get smarter that much more quickly. Other areas that I'm really excited about is just our approach to building outfits. If you think about why the early phases of our direct buy offering, I think, has been really successful, it's this idea of seeing an outfit that you -- an item you might like in the context of an outfit, most people aren't wearing a single item, they wear an outfit and our ability to train machine learning models to generate outfits. We keep getting better and better at. We've just released another version of our output algorithm that we know is out-performing in the way we do our AV-Testing. And we just consistently are investing in that. And then just finding new ways to dynamically generate things, a lot of things we start off doing with our stylists, and then we find ways in some places to do that purely by machine learning, and then we can take the site -- styling community to add more value in new places like lifestyling. And so we always think styling will be a big part of who we are. But what we're able to do is find ways to keep getting better and better at that kind of Human-in-the-loop machine learning, which I think is a really exciting part of our model. We don't intend to just have a shopping feed with no stylists. It's really the beauty of working across the combination of that human touch together with the powerful data models that we're building.

Yes. Yes. Yes, I'd like to talk about lifestyling a little later. But -- so being a little into your earnings call and the quarter that you guys just reported on Monday. So you mentioned longer cycle times as a reason for the lighter than expected top line. Can you maybe help us better understand exactly what went on? And is there any way to maybe to quantify the delays in cycle times. We've spoken to some smaller peers, and it seems like, at least what they've seen was anywhere between 1 week to 2 weeks at the height of the holiday shopping season. So maybe speak to that and maybe provide some more clarity.

Yes, yes. It's a very good question. Of course, we've been very much working on this for the last few months and continue to see some challenges there, frankly. Yes, I mean, the way we define cycle time just to be a little more descriptive on that is -- our model is obviously unique for our core Fix business. Direct buy operates a little bit differently, but still the majority of our revenue is with that Fix offering today. And of course, that will likely change over time. But in that model, we consider a cycle time and time from beginning to create that styling experience. We have the styling time associated with it, then we pick pack in our distribution centers. Then we send it out to a consumer. They tried it on and then they send back whatever items they may not be keeping, which is essentially the moment of checkout. And so we don't recognize revenue until that moment of checkout with the consumer. And where we saw just tremendous elevated cycle times was really the combination of that outbound delivery with our carriers, together with the return leg of those goods coming back in part as a result of consumers, actually holding the goods a little longer. But overall, the majority was these carrier delays. And we tend to see a little bit of an elevation in general in December. That's not unusual. It was just the quantum of elevation we saw was really unprecedented. And then typically, that clears in January. So when we were -- our last quarter, we reported in early December, we were beginning to see this, but it wasn't unprecedented. But as we got into later December, it started to look really unusual of how -- just how long those cycle times were, how elevated they were, but then we didn't see them clear in January, and we saw that push into even February. So we're doing a bunch of this stuff on our end now to -- continue to improve that, getting things faster through -- all the things within our control, we're doing even faster. We, of course, have a number of carriers we work with on the outbound. But part of the beauty of our model is it's super easy to return things as a consumer. We have 100% of our inbound back from consumers through USPS, which you just dropped that preposted package in the mail, which is usually a big advantage. But I think during this time, has presented some challenges. So yes, had we not had those delays, we would have been within our guidance range. And so I think it's a bit of a new challenge. We think it will improve over the course of the rest of the fiscal year. But of course, it's got us working on diversification of our carrier strategy and making sure we can create the best client experience possible.

Just out of curiosity, when did you actually start seeing it pick up? And I guess on the other side of it, what's implied in your guidance in terms of when does it finally normalize?

Yes. I mean, we actually saw it starting to pick up in like late November, but we didn't realize how the significance of it until probably mid- to late December. And then whereas we would have normally start to see clearing in early January, we really didn't see that till the very end of January where things started to look like it was normalizing, but then we had some of that significant weather in February. And we kind of we're back to where we started at the beginning of January in part because we have big distribution centers in Dallas and Indianapolis, which were a few very hard-hit areas. So we have incorporated some conservatism into our guide, given what we've been seeing and our best understanding of when we think that will clear. It can have an impact on subsequent Fixes. With the majority of our customers on a recurring cadence, it might mean if you were a monthly customer, you might miss a month within this 12-month cycle. And so that's part of what we're making sure we're being appropriately conservative in. We are anticipating that we will see this clear before the end of the fiscal year and hopefully well before that. But we've just incorporated some conservatism into our guide just based on this sort of unprecedented behavior we've seen. And we are working on it, and we will find our way out of it, but I think that played a role.

And typically, customers have, what, 30 days from where they receive to send that back?

Yes. I mean, we encourage consumers within 3 days to actually try it on and return it, but we do have a grace period. And of course, if consumers make requests to keep it longer, we honor that. And I think that was part of what we saw in December, which is not unlike what we actually saw at the beginning of COVID, people holding things much longer. We kind of saw more of that behavior in late December.

And is there a benefit or any plans to shrink that period? Increase period?

It's a good question. I do think that's a question we're asking, like, of course, we want to be able to create a great customer experience, but also making sure that those goods are making their way back and getting back to where we used to be is definitely a goal for us. And I think as the world opening up again, vaccinations rolling out, we would anticipate that normalizing over time.

Got it. Got it. Okay. That's super helpful. So thank you for all that. Switching topics a little bit to preview and other things that you guys are doing. So Fix preview is clearly no-brainer. I'm surprised, honestly, it took you so long to finally start offering it. But you seem to have tested in the U.K. planning to launch in the U.S. Can you -- is there any way to well, I think qualitatively, I guess, you guys spoke to it a little bit on the call, but maybe speak to the potential of it to increase maybe retention, shrink, returns, et cetera. Theoretically, it kind of makes a lot of sense, but any kind of KPIs you can share to put more kind of details on that?

Yes, definitely. Well, first of all, we just feel really excited about the sign-ups to our Fix business overall. We saw 50% year-on-year growth of new customers to our Fix model during Q2, which tends to be a quarter where we don't acquire as many customers, just given it's the holiday season. And so the combination of the momentum of product market fit of our core Fix model, together with things like Fix Preview and lifestyling, we think are just really exciting evolutions in our model. And so with Fix Preview, maybe just to explain it, to your point, you said, it is a little bit like amazing. We've been as successful as we have been without having something that seems reasonably obvious that some people might want this. Our model has been historically entirely surprise and delight. Of course, many of our customers send request notes to their stylist of things they'd like to see. But we've sold $7 billion worth of clothes totally sight unseen. You don't know what you're going to get. It's surprise in the light, which is a pretty extraordinary feat of our data science and styling capabilities. But what we -- to your point, we began testing in the U.K. back in August was this idea, if you know what, there's a bunch of people who probably would like to preview it. And one data point, in particular, that I had found super compelling when I joined was trying to study these clients that we call our prospects who go all the way through our style profile and then they don't sign up, which is now a group of people in the millions. And 45% of them say, if you just showed me a preview, I would convert. And so that was one of the impetuses of testing this out. And so the way that the experience works is we basically trigger an interaction with the consumer, and we show them a 10-item preview. And from that, we're gathering their feedback on what they'd love to see actually show up in their Fix. And then we get feedback on the things they don't want to, which is actually really powerful data for and then based on that, the stylist finishes the Fix, we send the five items. And what we've seen in the U.K. has been just fantastic. On average, 10% higher average order values in part because of higher keep rates, just higher client satisfaction and higher retention. And so all of those things are pretty exciting, just revelation of like, yes, this is a great experience for those that are opting in, and about 3/4 of our U.K. customers are opting into it. So we have now taken that to 100% of the U.K., it's fully rolled out. And then we began testing it a couple of months ago in the U.S. before fully rolling it out to make sure we're seeing the same things in a market that's much more mature for us. And we're really pleased with what we're seeing. So we're now -- we just started scaling it with the intent of bringing it to 100% of the U.S. by the end of the fiscal year.

Okay. So by end of fiscal year, it will be fully rolled out here. All right. And so you're taking that one step further, you're adding Zoom to it.

Yes. Yes.

So tell us about that. How -- if the -- if preview got you 10%, how much Zoom can get to you?

Yes. I mean we started both in ideation around the same time. And for the live styling, as we're calling it, we're still in incubation mode, but we are seeing very similar trends. And with that, we actually began in a super scrappy way just doing zoom calls. And then with a set of very excited stylists. We surfaced the internal software tool that our stylists use, which we call [indiscernible] that they're using to actually build what goes in a Fix. And the results we saw, the feedback were really positive. So we said, well, let's start building this into a real product. So we reskin that software to be relevant for a call to make it highly interactive. And we've been really excited with what we're seeing. I think there's a few really unexpected, but may be surprising things. Clients will go into their wardrobe and pick something out and say, I really want something to go with this. So this is my favorite thing. Do you have something like it, it's kind of getting worn out. And so we're kind of building an even deeper trusted relationship. We're getting insight into the client's closet. We're getting insight into other things they might want in the future, ideas of even just advice they might want on styling things beyond transactions. And so we're doing a lot of work right now to scale Fix Preview and get direct buy ready for new customers. We would anticipate scaling lifestyling in the future, but we're going to keep kind of tinkering with it for now before we scale it. But I do think your intuition, there are a lot of people who like to maybe do a lot of shopping a couple of times a year. Maybe that's the best experience for that. Or maybe you're going through a big life stage change, like maybe you lost a lot of weight or maybe you just came back from maternity leave and you're tired of wearing Mature Nicolas and you're ready for new clothes, like those could be moments where a fashion like that is very impactful. So we're very excited about the possibilities with the intent to continue to fine-tune it and hopefully scale it in the next fiscal year.

Is that something you can scale where you can have -- I mean, you're at 4 million subscribers, that's grown really fast. My understanding is that you get a chance of spending 30 minutes with your stylists going through or whatever. That's a lot of time. And so how do you scale that? So and I guess, related to that or maybe not. We saw that you have 6,000 stylists right now. I thought the last time I looked, you were like 2000. So has there been such a huge increase in stylist recently? And again, the 2 are not necessarily related, but maybe speak to that.

Yes, yes. Well, those are both great questions. So I guess on the first one, I'd like the feasibility of scaling a 30 minutes for high-touch experience. I think it's a great question. I mean, maybe a couple of thoughts there, hence, the desire to tinker and incubate that a bit longer. One is, I don't know that everybody would opt into it all the time. So I think that, I think, probably creates some ability for scalability there. But the other is, like right now, the way we're doing is use schedule a session based on when it works. But a lot of times, maybe it's a shorter on demand interaction that you want for just 10 minutes. So I think there's a lot of possibilities that might make sense that we need to kind of continue to see what consumers would value most. In terms of our client -- or our styles population, you're right. We actually, over the course of the fall, we added 2,000-plus new stylists, and we're continuing to add stylists to that community. Part of it is to be able to do some of these new experiences. Part of it is just the growth that we're seeing in the business. So yes, I think we were probably a little under 5,000 last summer and now we're at about 6,000, and we're just continuing to see a great mix of part-time stylists, some are full time. And there's a lot of different roles that our stylists play. They are helping, in some cases, train our outfit models for our shop experience. They are, of course, styling Fixes for our consumers. They're helping us test things like lifestyling and a number of new experiences. In the U.K., we actually have had stylist play a role like in an influencer and an ambassador within our marketing campaign. So we see a lot of possibilities of that community, continuing to play a role both in transaction-based experience, but in the future, things like advice and content as well. So we're continuing to get the benefit of a very vibrant community, a very diverse community that wants to participate in building these experiences with us.

Yes. That sounds really exciting. So talk to us now about direct buy, so you decided to delay the rollout thereby apply to non-clients until the end of the year. So what went into that decision?

Yes. It's a great question. We've definitely gotten in a lot this week. If you think about how we began direct buy a year ago, we started it off just a year ago with complete year looks, which everything we did in the first phase of Direct buy was for the advent of an existing Stitch Fix client and enhancing that experience. Of course, there were certain purchase occasions. We weren't supporting them in to the Fix that we thought we could help with. And even one of the triggers for that offering was people loving the style cards that we put in a Fix of suggesting ways to wear the items that we send. And of course, there are other items that we show in those style cards are people like, I'd love to buy those items. And so the first algorithm and the first shopping feed was all based on items you had previously bought and seeing other things to go with it. And of course, we refresh it on a very regular basis every day. Then we moved in June into Trending For You, which was removing that previous purchase requirement, showing just a series of looks that we think would meet your style preferences and, of course, always everything will fit you. And those have been very successful. They, of course, are very inspiration, browse-based experiences. If you think about a brand-new customer coming into Stitch Fix, that doesn't have that prior purchase experience with us. And a lot of times, if you're shopping for something, maybe 40%, 50% of the time, you're kind of looking for something within a particular realm, maybe you're looking for a new pair of jeans, maybe you're looking for a new blazer. Maybe you're looking for that first fun shirt for going out at night finally and getting back out into a restaurant. And those experiences are harder to shop by just having an outfit-based feed, you actually want to be able to engage with categories. You want to be able to kind of browse based on maybe a brand. And so I think we began testing a categories based experience in late November, and we're really excited about what we're seeing. We've been fine-tuning it. But we've realized if you're a brand new customer, we want to make sure we have enough for that to be a very rich and high breadth experience. And that's essentially a big part of what we're working on and how do we even dynamically generate those categories. A lot of traditional e-commerce just has fixed tagged data on a top, a bottom, identifying what it is. What we're trying to do is actually extract using computer vision features of categories that will allow us to have hundreds of categories over time that we generate based on signal from you of what you might be looking for. So those are some of the things we're working on, some of which will hopefully be at the very beginning of launch. Some will be fast follow. There's also the complexity of onboarding very quickly into the experience. We've been testing some new onboarding clothes that are simpler and quicker, but also getting a good sense of consumer style. And then things like our supply chain and operations, making sure they're adequately ready. And then even the way that we market and talk about ourselves as a brand. So there's just a lot that goes into it. And we've been testing and iterating this whole time, and we will continue to do so. But we want to really make sure we get it right. It's a 0 to 1 experience. It's not just the things that we've been doing for our existing clients. There's a lot of newness that we're working on as well.

We can't wait. So on the -- I guess, providing the right inventory, the rich experience that you're looking for, maybe can you touch on the new inventory models that you are exploring the consignment, the drop ship, et cetera, how material are these to you over the short, medium-term over time, who knows? But how are you thinking about these? Are they just additive to what you're already doing? And the vast majority of your business is still going to be as it is today? Or would drop ship, for instance, be a big area of growth as you push into these nonsubscribers?

Yes. It's a great question. We're very excited about the flywheel that we feel like we can have by great selection and multiple inventory models together with our personalized shopping experience and just what that will enable us to do for future long-term growth. And so just to educate on our current inventory model and the historic model that we've had as a company has been wholesale. We're buying goods on receipt and then selling them through. A good chunk of our inventory are our own exclusive brands. But for all of those goods, we're buying them in a reasonably traditional retail way, albeit with a lot of value-add from the way we use data science to inform the goods we're buying, how we optimize them, et cetera, and typically have had 5 to 6 to 7-point turns of that inventory because we're pretty efficient with how we do that. That said, the idea of shopping and really transforming the way people find what they love, matching them with anything out there like the way we've almost internally have been talking about it is infinite inventory. We want to find any good that's right for Youssef. That's right for Elizabeth, our own personal store, and we want to ungate the constraint of the wholesale model. And so what we've been working on is the vendor relationships, the infrastructure from a technology standpoint for payments and payments processing as well as how we forecast in a very sophisticated way, the usage of things like a consignment like model, which we've been calling Flex, where we take more on a vendor's inventory within our warehouses. And once we sell it through, we pay for those goods and the relationship with our vendors, which is different than a traditional wholesale model. And then similarly, drop ship, which is a more standard offering, being able to do that as well. So we've been in beta mode now for several months with that Flex consignment model. We're excited by what we're seeing, working with our vendors and getting the technology in place to be able to do that and over time, scale it, and then we're in early stages of testing of drop ship. And to your question, over time, what might that portfolio look like? I mean, we would anticipate both of those other models would be a significant part of our inventory in addition to -- in certain situations, wholesale. Of course, our exclusive brands, which we're building, and we have a very good understanding of likely will continue to be wholesale and even part of some of our market brands. But really, the idea is very much win-win, win, win for customers on great selection, win for our vendors, which will hopefully be even higher growth with them by accessing more customers, more clients. And of course, win for Stitch Fix to be able to kind of ungate this growth. So I think we'll have a lot more to share in the beginning of FY '22 as we're seeing more clarity at how quickly we'll be scaling these, but we are very much testing them already right now.

Would consignment mean that you would have to increase the number of FCs that you're operating over the next, say, twelve months? Or...

I think not in the next 12 months, I mean, over time, certainly. So we've shared that we're opening another distribution center in Salt Lake City as we exit the one that we've had for many years in South San Francisco, which we are sad to leave the Bay Area community, but needed to find space that could accommodate our scale. And -- but what we're doing is we're actually adding right now, a tremendous amount of density to those warehouses. We also just had opened up a new Indianapolis facility last year. So we actually have been adding to our network and are already adding right now. But there's also things that we can do like adding mezzanines, which is essentially doubling the capacity of our facilities. We do a lot on hanger today, so also experimenting with flat packing. The combination of those things will actually add a lot of density to the distribution network we already have. Of course, over time, I would imagine we will eventually add to it. But in the foreseeable future, we actually have headroom within the FCs that we have today.

Literally headroom.

Exactly.

That's agreed. All right. With the few minutes we have left, I need to ask you a couple of financial questions. I feel bad because Dan is not with you. So you don't have the benefit of throwing the questions to him, but I totally understand if you dodge them, but we did get a whole ton -- a whole lot of questions. So let me try. So as you look at your, call it, 19%, maybe 20% growth that you guys have guided to for fiscal '21. Is it fair to assume that the vast majority of that is obviously coming from the Fix business with direct buy contributing maybe a few hundred basis points. Just -- is that the right way of thinking about the growth.

Yes. I mean we don't break the 2 of those things out. I think the majority of our business is still the Fix business. And the things that we have shared are our first Fix growth rates have been extraordinary the last few quarters, the 50 -- adding 100,000 new clients in Q2, close to $0.25 million in Q1. So certainly, our first Fixes and that growth rate is part of it, and we have our subsequent Fixes, which one thing that's been sort of a lingering effect on our growth has been really missing out on the Q3 cohort of 2020 with COVID, which we're now going to start lapping. So that is contributing to our growth, and we will hope to see acceleration there. And then, yes, direct buy, of course, we're starting to lap the business having existed, but it is getting bigger and bigger, given it's now around about 1/4 of our women have participated, where that was in the high single digits and maybe a little over 10% this time last year.

Okay. Fair. And then if you look at the business from -- this predates you, right, you're the President, so you're still going to be able to hook for it. So if I look at the business from 2016 to 2020, you guys added about $1 billion in revenues. Yet your profitability went down by 50% over that period. So can you speak to the drivers of that? And are we at a point yet when we start seeing it reversing, i.e., start to see in margin, starting to see some margin leverage, margin stabilization, at least and then margin leverage, say, over the next 12 to 18 months?

Yes. No, it's a great question. I mean, I think maybe a few parts to that question. One is like in the near-term foreseeable future, we feel like this is a pretty rare moment in time for us to capitalize on growth. The land rush of consumers shifting online, our model being at the right place at the right time. And what we're introducing to really address the full market opportunity is a growth plan. We want to make sure we're doing that, of course, prudently, but in a way that we're bringing in those new customers and providing the kind of product experiences that will make them long-term customers over time. And we are very focused on generating free cash flow in a very significant way in that long-term basis. There are some places to your cost structure point that have elevated even just in the very near-term that we need to get cost-effective on, and we absolutely intend to. Just in the last few months, this notion of really making sure that we're in the right place with our warehouse employees. We all -- all of those employees are now at $15 an hour or more, also making sure that we have stability within that group. I mean there's so much shifting to e-commerce, making sure that we have a population that can continue to serve our customers. And so there are some near-term headwinds that we've seen on that cost structure that we absolutely anticipate being able to get leverage over time. But there are places we do want to invest. If we're going to continue to see the trends we've seen on positive customer acquisition, we want to invest in marketing. We want to invest in the engineering and data science talent to build new products. But I think the contribution economics of our model are very, very good. And so that is part of why we've been so profitable earlier on in our history, we are now innovating in a very big way for a big second next chapter of the business. And so I almost think of it as like a new era where we absolutely will see that leverage, but we also don't want to miss the moment of being able to play a very disruptive role in this next phase of e-commerce. And so when you put it in that context, it's growth and free cash flow that we really think about and bringing a lot more active clients into the Stitch Fix ecosystem and making sure we're delivering those great contribution economics with a path to overall leverage over time.

Okay. All right. So it's growth, growth, growth, but with an eye towards showing margin leverage over time. Makes sense for free cash flow. We noticed something in the Style Shuffle. We noticed that you guys are testing some home decor product. Is that an area that you guys may potentially move into?

I don't think we've actually tested any home decor, if not, it might be just a fun game that we're playing. There's no immediate term plans to go into home decor. I think we feel like we are a little over $2 billion company this year in a $400 billion U.S. apparel market. There's a lot of headroom there for us to participate in. And in a very complex choice category that we think we're very good at, having a 10-year advantage in our data. Over time, will we explore and get into other categories, I think, absolutely, but there's still -- there's a lot of categories that we feel like there's a ton of headroom and even ones relative to where we're strongest, that we see a lot of upside in today. So it's a great question. I'm going to have to get to the bottom of this Style Shuffle example of it.

Yes, some snapshots and a couple of things. So lastly, from your many conversations with investors and especially, I guess, after the last couple of these. What do you think they are missing or we're missing in terms of the Stitch Fix story and just the opportunity you had?

Yes. It's a great question. I mean, if you think about most e-commerce that's out there, you're filtering through tons and tons of things to hopefully find something you might like and might fit you. I think our approach is just fundamentally different where we are creating the personalized store for you, together with the human touch of our styling community. And over time, I -- US is really a commerce relationship company that has a role to play even more with content and you being part of like that daily active experience, which we can see in people's usage of Style Shuffle, where we're starting to see it in the way that they're checking their shop feed every day. And so I think there -- as we started talking about direct buy, there is sometimes a misinterpretation of, "Oh, you're now going to do kind of like e-commerce to that everybody else does." And it could not be further from the truth of us really wanting to build a fundamentally new approach to how people shop and find what they love in the most personalized way.

All right. Well, we'll be watching. So Elizabeth, thank you so much. This was a lot of fun.

It was fun. Thank you.

Thank you, and thanks, everybody, for listening to us and talk to you soon. Be safe out there.