How pandemic darling Stitch Fix returned to growth

Could Stitch Fix be on the path to a comeback? 

The clothing subscription service, one of the many pandemic winners that’s struggled to find itself in a post-lockdown world, is back to growth and seeing some early wins from a turnaround strategy that’s just over two years in the making. 

Under CEO Matt Baer, a former Walmart and Macy’s executive who was tapped to helm the business in June 2023, Stitch Fix posted its first revenue growth in 12 straight quarters for the three months ended May 3. It’s now forecasting its second consecutive quarter of top-line growth. 

While the apparel company’s customer file is still shrinking, its average order value has grown for seven consecutive quarters and every client cohort it’s acquired since last summer has stayed with the company for longer, and spent more, it said. 

The company, which charges a $20 styling fee for all “fixes” it sends, saw revenue per active client grow to $542 during its most recent quarter, up 3% from the year-ago period. 

“It’s been really affirming to us that, you know, with this return to growth, with this increase in engagement, with this increase in average order value, that we do have the right strategy,” Baer told CNBC in an interview. “We’ve got the right team and we’re executing against it at a high level as well.”

Stitch Fix hasn’t posted an annual profit since 2019 but for three straight quarters, its year-over-year losses have narrowed. It regularly generates free cash flow and its balance sheet is free of debt.

To be sure, Stitch Fix’s sales growth in its fiscal third quarter was modest, up just 0.7%, but it expects those gains to continue in its current quarter with sales projected to be flat to up 1.7% year over year. 

And the company’s stock price is still down more than 95% from its pandemic high in January 2021. So far this year, it’s up more than 3% as of Friday’s close. 

Retail and restaurant consultant Katrina Lake founded Stitch Fix in 2011 with the mission to combine data with personalized styling to develop a shopping experience that actually felt individualized at scale.

In a world where shoppers regularly groan about the banality of modern-day shopping, Stitch Fix sought to be the panacea by offering accessible personal stylists that could design and ship outfits specific to a customer’s unique needs and preferences.

Between its IPO in 2017 and 2021, the company was able to acquire customers cheaply online and regularly posted revenue growth north of 20%. 

But then the market grew crowded and suddenly, customers found themselves overwhelmed by all of the companies looking to sell them a monthly subscription box, whether it was a package of clothes, beauty products or dog treats.

The pandemic had changed the way customers were shopping for clothes, and Stitch Fix struggled to hang on to the customers it acquired. Some shoppers found the company’s service clunky and confusing, and the assortment started to feel stale and out of style. The company’s main value proposition, its personalized styling service, began to feel generic to some and disconnected from their personalized needs and style. 

Within four years, the company went from an $11 billion buzzy startup to a tiny business that’s now worth just under $600 million.

In January 2023, StitchFix announced that CEO Elizabeth Spaulding would be stepping down and Lake would return to the helm as its interim CEO and lead the search process for a new top executive.

Before joining Stitch Fix, Baer spent four years as a vice president on Walmart’s e-commerce team during a critical phase of its online growth. He later joined Macy’s as its chief customer and digital officer, where he remained until Lake hired him to revive the subscription styling service. 

But Baer’s career in retail started long before that: At 16, he started working in his family business, Baer’s Furniture & Interior Design, a small chain of furniture stores dotted along the Florida coasts and founded by his great-grandfather in 1945. 

“Growing up in a retail family business, when your name’s on the door, it might mean a little bit extra,” Baer said. “At a very young age, I was also front and center with our clients. I was greeting them when they would walk into a showroom. I was asking them what it is that they were looking for. I was able to understand their needs and translate that into an exceptional service that we could provide.” 

Baer said his first order of business after taking over at Stitch Fix was to understand the company’s primary client and how that shopper was experiencing the service. 

Within a few months, he was attending client focus groups, styling “fixes” — the curated shipments of clothes that go out to customers — and identifying parts of the process that could be improved for both shoppers and the company’s roster of stylists.

He said he learned that customers liked the flexibility of Stitch Fix’s model but wanted more of it, along with more head-to-toe styling that included accessories and footwear. 

In Stitch Fix’s early days, customers had one option – five items in a box at a recurring cadence with one discount mechanism – but these days, there’s less rigidity. Customers can order a fix on demand, opt in for regular deliveries or shop through Stitch Fix’s “freestyle” catalog, which allows them to instantly select and buy pieces based on their style profile. 

These changes, along with larger fixes that can include eight items, is what’s fueling Stitch Fix’s growth in sales and average order value, said Baer. 

Behind the scenes, Baer said, he also sought to infuse “retail best practices” into every facet of the business, which has a model that comes with steep operational challenges. With no physical retail presence, Stitch Fix’s online customer acquisition is expensive and the company has to manage the headaches of packing individual boxes and then processing the stream of free returns that come when clients don’t like the items that came with their fix.

Under Baer’s direction, the company has worked to streamline merchandising, pricing, transportation and warehouse operations. It exited the U.K. market, closed two fulfilment centers and cut staff to get costs closer in line with the size of the business. That work is still ongoing but has cut more than $100 million in annualized general and administrative expenses out of the business, Baer said. An additional $80 million in cost savings is slated for fiscal 2025, research firm William Blair said in a July note.

Another primary area of focus was adjusting Stitch Fix’s assortment and revamping its private brand portfolio, which comes at a higher margin and makes up between 40% and 50% of sales, according to Stich Fix. The company has launched new private brands, and one of its men’s lines, The Commons, is now a top 10 brand within the overall portfolio, said Baer. 

The company has deployed generative artificial intelligence for product design and development and on Monday announced plans to expand its use of AI to improve its styling.

A new AI “style assistant” will allow customers to talk to a chatbot that can recommend AI-generated outfits based on their individual preferences. It also plans to deploy a service that will allow clients to see themselves in the outfits their stylists recommend, which could reduce returns and boost conversion. 

For those more eager for a human touch, the company is also launching a new platform that’ll allow shoppers to connect directly with their stylist if they need fashion advice or help with their fix. 

More than two years into his tenure, Baer said he’s still attending monthly client focus groups and styling fixes for customers “nearly every day,” which he said allows him to stay close to customers. 

“One client, she lives in Letcher, South Dakota, population 159, and it’s only because of Stitch Fix that she has access to these brands, that she has the ability to wear product and clothes that are differentiated, unique and special within her community,” said Baer. “That feels great when I give her that confidence, when I’m able to create that joy for her.” 

Stitch Fix’s turnaround comes at a difficult time for the apparel industry. Shoppers are more selective than ever with their discretionary dollars, and Stitch Fix’s $20 styling fee can feel unnecessary when customers can purchase many of the same items the retailer offers right off the rack and directly from the brand. 

In a June research note, financial firm Mizuho Securities said Stitch Fix’s growth in average order value is expected to dissipate in fiscal 2026 as it laps its expansion into larger fixes. Its active client base is still declining, even as marketing expenses creep higher as a percentage of revenue, the firm said. 

“While management attributed outsized growth to more opportunistic spend and some natural investment cycle, we caution whether it’s becoming more expensive to keep the active customer base engaged,” Mizuho analyst David Bellinger wrote. 

In the note, Bellinger maintained his underperform rating on the stock and price target of $3.

Meanwhile, William Blair analyst Dylan Carden upgraded his rating on the stock in July to outperform after meeting with Baer and the company’s CFO. Carden contended the largest headwinds to the stock “despite clear improvement in fundamentals” are the idea that Stitch Fix is a niche product, its total addressable market is small and active customers are expected to eventually stall.

Carden noted “the model likely works for some but nowhere near any sort of critical mass of consumers.”

“This would suggest it is less about Stitch Fix returning to active customer growth and more about being able to string together several quarters of growth at improving margin (i.e., healthy growth) before a skeptical market will start giving it credit,” he wrote.

Neil Saunders, managing director of GlobalData, agreed the company is now on a better trajectory.

“The consumer economy hasn’t been conducive to the growth of subscription platforms, but many of the improvements and enhancements Stitch Fix has been making are starting to pay dividends,” said Saunders. “It is becoming a stickier proposition which should drive some future growth.”