International expansion and a refreshed strategy could lead to a rising share price for Stitch Fix Inc. (SFIX, Financial). The subscription-based personal styling company is expanding into the U.K., where growth in online clothing sales is forecasted to rise rapidly over the next several years.
The company is also set to boost its competitive advantage through investments in an enhanced inventory optimization algorithm that has resulted in increased average order volumes so far.
Though there is a threat from heightened competition, cross-selling opportunities as a result of a revised marketing campaign remain high.
Having risen 20% in the last year versus a 1% gain for the S&P 500, the stock could offer investment appeal for the long term.
International expansion
The company’s expansion into the U.K. could catalyze its financial performance. The market offers a more widespread acceptance of online shopping versus the U.S., while there is also less focus among existing retailers on discounting when compared to other major consumer markets around the world.
Stitch Fix has the potential to grab market share in the U.K. as a result of using its existing data analytics. This will help to align its offerings with local consumer preferences. It has hired a team to work alongside local brands, while building up a waitlist as there may be strong initial interest among customers.
The company has a solid track record of diversifying into new segments and markets. For example, its shift into plus-sized clothing and kids clothing have enhanced its growth prospects. Although Great Britain's economy faces an uncertain near-term future due to Brexit, clothing sales are forecasted to grow at an annualized 3.1% rate through 2022. Online sales are expected to increase 10% per year over the same period.
Refreshed strategy
Investments in the company’s use of data analytics could provide it with a competitive advantage versus sector peers. In the most recent quarter, it released a new inventory optimization algorithm that more effectively allocates products across its customer base. The technology considers a broader range of factors to determine which inventory should be made available to which customers. This replaces a simpler process, which was essentially a queue-based system that did not consider the wider preferences of its subscribers.
The new algorithm has resulted in improved customer satisfaction as well as an increase in average order value. It also has the potential to improve efficiency as the business grows, providing even greater differentiation versus peers.
Threats
Walmart's (WMT, Financial) entry into the subscription apparel service segment could pose a threat to Stitch Fix’s long-term future. The retail giant recently announced a partnership with Kidbox, which offers clothing boxes for children that are based on the responses to a variety of questions. The service charges a styling fee, while the price points of its clothing items are similar to those of Stitch Fix. Although Walmart is currently focused on children's clothing, its subscription apparel service could be expanded to cover the same segments as Stitch Fix, which may lead to increased competition over the long run.
In order to strengthen its competitive position, Stitch Fix is seeking to maximize its cross-selling opportunities. As part of this initiative, it is increasing exposure of its brand among existing customers, focusing on the promotion of the range of services it offers. Since 88% of its revenue is generated from previous customers, there appears to be significant scope to sell additional services to existing customers. As a result, the company recently launched its first integrated brand campaign, which aims to re-engage existing customers while also building awareness among new customers.
Outlook
For the next fiscal year, Stitch Fix guided for a 23% increase in earnings per share. This helps to justify its forward price-earnings ratio of 105.
Although the stock may not be cheap currently, its strategy could lead to improving financial performance that produces continued growth in its stock price.
For example, its expansion into the U.K. may lead to improved sales as well as greater diversity. Likewise, its updated algorithm may produce a more efficient business model that is better able to build customer loyalty through enhanced satisfaction levels.
While there are threats from competitors such as Walmart, who are gradually moving into the subscription apparel segment, the company has a loyal customer base and has several cross-selling opportunities.
Having outperformed the S&P 500 in the last year, further capital growth could be ahead.
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