5 Key Takeaways From Stitch Fix CEO Katrina Lake

Personalized, internet-based, and guided by artificial intelligence, fashion clothing company Stitch Fix (NASDAQ: SFIX) is not a typical retailer. Investors have been curious and cautious about this newcomer since its initial public offering in November 2017.

At the recent JP Morgan Global Technology, Media, and Communications Conference, Stitch Fix founder and CEO Katrina Lake helped investors better understand the company's direction. Here are five major takeaways from the conference that investors should know when considering an investment in Stitch Fix.

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1. Stitch Fix is not a subscription company

While many investors initially compared Stitch Fix to subscription companies like the now struggling meal-provider Blue Apron, Stitch Fix is not a subscription company. Clients have the option to receive fixes (i.e. orders) at regular intervals, purchase fixes one at a time, or put their account on pause when they feel their closets are full. Because Stitch Fix emphasizes personalization, its customers are in total control. Lake explained:

Although Stitch Fix's sales to each customer vary, the company succeeds in doing what's best for its clients and generates loyalty. It's the relationships between stylists and customers, successful product recommendations, and satisfying shopping experiences that keep Stitch Fix customers coming back for more. This strategy is working. Stitch Fix's average revenue per client and keep rates are increasing, and more than one million clients have reengaged with Stitch Fix after 16 or more weeks of inactivity.

2. Growth is our choice

Investors should understand that while Stitch Fix's growth rates are far ahead of traditional retailers like Macy's or Nordstrom, Stitch Fix is not pursuing the growth-at-all-costs model that investors see from high-flying software-as-a-service companies. Instead, Stitch Fix plans for consistent growth over time and manages its business to meet those targets. The company has been growing at approximately 20% to 25%, a growth rate that the company has intentionally targeted. At the conference, Lake described how the company sets its goals:

To avoid disappointment, potential Stitch Fix investors should understand that the company is specifically managing its expansion to hit pre-planned targets. So far, Stitch Fix has proven capable of delivering consistent, sustainable growth rates.

3. Personalization is the future of shopping

It's sometimes difficult for me to summarize Stitch Fix's business. Is it a traditional retailer? A fashion company? A tech company? While it's easy to get lost in the details, Stitch Fix describes its service with ease -- "personal styling" -- with an emphasis on personal. Stitch Fix is in the business of personalization. Lake shared how important this is for the company:

Offering a great shopping experience is top of mind. When talking about what makes a successful stylist, Lake noted that empathy, listening, and understanding what the client wants are the most important attributes of the Stitch Fix styling team.

When asked about competition, Lake said that her team is not seeing many competitors who are approaching personalization the same way that Stitch Fix is. And for now, the company is competing more with traditional physical retailers than other online companies. As more clothes shopping dollars come online, Stitch Fix hopes to capture more and more of the market.

4. Active clients are number one

When faced with higher-than-expected customer demand during its fiscal 2019 second quarter, Stitch Fix chose to defer advertising dollars to later in the year. Stitch Fix seeks to balance customer acquisition efforts to ensure that new clients are not brought in when inventory is tight, which would reduce available selection and likely result in less satisfactory experiences for customers.

Lake explained the value of satisfying existing customers first and foremost:

Growing revenue from current customers and gaining new customers are both necessary for Stitch Fix to achieve its goals. As Stitch Fix spends on more advertising and marketing, Lake noted her preference for finding high-value customers via targeted approaches, where the cost of acquiring a new client is more expensive, but the payback is quick and profitable. The company will try to focus its acquisition efforts on the kinds of shoppers who are most satisfied with Stitch Fix versus broad brush approaches that bring in a higher number of customers that may or may not be the best fit for the service.

5. Men use Stitch Fix, too

Stitch Fix skeptics may be surprised, but Lake reported that the Stitch Fix Men's service, launched in the fall of 2016, is performing very well.

Stitch Fix put considerable effort into developing the men's service, specifically working on men's fit preferences and developing exclusive brand offerings to fill gaps and ensure that the quality, price points, and styles offered meet the needs of its customers.

On average, men spend about 66% of what women spend on clothing purchases. Lake reported that at Stitch Fix, men's spending levels are reaching more than 80% of women's spending levels. Stitch Fix's emphasis on men's fit and personalization is working, and this category should continue to drive growth.

In addition to its men's offerings, Stitch Fix's additional service expansions in plus sizes, children's wear, and its recent launch in the United Kingdom are laying the groundwork for future growth.

What's next for Stitch Fix?

As Stitch Fix continues to acquire new customers, gain loyalty and share of wallet, and scale up its newer categories, investors should expect the company to stay on its trajectory of consistent, strong results

This potential disruptor hasn't been easy for investors to understand. If the market remains uncertain or even doubtful of Stitch Fix's approach, bullish investors may find some attractive buying opportunities.

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Karen Mikolainis owns shares of Stitch Fix and has the following options: long January 2021 $20 calls on Stitch Fix and short September 2019 $22 puts on Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.