The retailer recently updated its core recommendation algorithm to a novel client time series model architecture, which unifies data from client interactions across both fix and freestyle.
Stitch Fix is making changes across its business, including reducing its workforce.
The online clothing retailer will lay off 15% of its salaried staff. Most of the reductions are in non-technology corporate roles and styling leadership roles, the retailer said, and represent approximately 4% of roles in total.
As a result of this decision and other changes, Stitch Fix expects annual cost savings of $40 million to $60 million in fiscal year 2023. The company expects to incur restructuring and other one-time charges of approximately $15 million to $20 million to be recognized in the fourth quarter of fiscal 2022.
Stitch Fix said this is the right decision to position itself for profitable growth in the future.
“We are centralizing a number of key capabilities and streamlining decision-making to drive efficiencies in how we operate and deliver experiences,” president Elizabeth Spaulding said on the retailer’s Q3 2022 earnings call. “We are also ensuring that we are allocating resources to our most critical priorities. Going forward, we will continue to innovate our client experience and broaden our offering.”
Stitch Fix generated net revenue of $493 million, reflecting an 8% decline year over year and an adjusted EBITDA loss of $36 million. Active clients declined 200,000 or 5% year over year and 112,000 or 3% quarter over quarter, ending Q3 at 3.9 million. Both conversion and traffic played a role in the 3% active client decline, while overall new client traffic to the website was also down in Q3.
“We are deeply focused on driving traffic into our ecosystem and reigniting new customer conversion,” said Spaulding. “As part of these efforts, we are further diversifying our marketing portfolio with the support of our new chief marketing officer.”
Debbie Rose Woloshin, previously the CMO at Marc Jacobs, took the position of chief marketing officer on May 23.
Updated Algorithm and Personalized Search
Stitch Fix sends personalized shipments (dubbed a “Fix”) of apparel, shoes and accessories, hand-selected by Stitch Fix stylists, to shoppers’ homes. In 2019, Stitch Fix was named the top retailer on Fast Company's “The World’s 50 Most Innovative Companies” list, thanks to its innovative model.
Yet in 2021 the company launched Stitch Fix Freestyle, allowing anyone to be able to purchase items directly from Stitch Fix without ordering a Fix first. Moving to a more traditional e-commerce model is enabling the retailer to serve both on-demand styling needs as well as to begin to acquire new clients through personalized shopping, it said.
“Today, approximately 20% of Freestyle First customers come back and purchase again within 30 days,” said Spaulding.
As the retailer capitalizes on a mix of personalized Fixes and traditional e-commerce orders, it's updating its online experience as well.
“To improve our clients' experiences, we recently updated our core recommendation algorithm to a novel client time series model architecture, which unifies data from client interactions across both Fix and Freestyle," she continued. "Historically, our algorithms focused on understanding a client set of specific attributes.”
In contrast, this model focuses on understanding the client through their interactions with Stitch Fix over time, she explained.
A test of the new model demonstrated significant improvements to client outcomes with a nearly 6% lift in Freestyle revenue and a 4% lift in Freestyle reorders over a 30-day period compared to the previous algorithm. It is now rolled out across the Freestyle experience, she said.
Additionally, Stich Fix has rolled out personalized search. With this feature, client search results only show in-stock items that match individual style preferences, fit, and size.
“We believe this will drive continued engagement once inside our ecosystem for our clients as this has been the most highly requested new feature,” said Spaulding.
During the earnings call, a UBS analyst questioned why it took this long to launch a personalized search, considering the amount of data that Stich Fix has on its customers.
Spaulding replied that the Freestyle experience began as an add-on to the company’s Fix business.
“As we embarked on building out more Freestyle over the last year, we added things like product categories, more new brands,” she said. “We now have a home feed where you can shop looks in your community using computer vision. But really, our first part of call had been being able to just serve up personalized recommendations through outfit feeds and categories. And so, I think there's just many features that we still have yet to offer and personalized search was one that was one that was highly demanded. And we wanted to make sure that as we launched it, we both tested it, but also that we are serving up items that are ones that will fit our clients.”
The personalized search reflects items immediately in stock that will fulfill the customer’s price preferences. Looking ahead, Stich Fix will start to layer on things like outfits to the personalized search feature.
“I think it's just one of many things in our product road map that we will be rolling out over time,” Spaulding concluded.