Stitch Fix CEO says the company is getting better at finding the most valuable customers for its service

Key Points
  • Shares of Stitch Fix rose nearly 15% Thursday after the online personal styling company reported Wednesday that it beat earnings and sales expectations in the fiscal third quarter of 2019.
  • It was helped by the healthy growth of its women's business and the scaling up of its men's business, the company said.
  • The company says it had 3.1 million active clients in the third quarter.
Stitch Fix CEO Katrina Lake on company's earnings beat

If you wear premium jeans, then Stitch Fix's algorithm may have its eyes on you.

The personal styling company uses predictive algorithms to look at a number of attributes to determine who will make a successful client. This approach proved very successful in the latest quarter, with the company beating third-quarter estimates on the top and bottom lines, sending its stock up nearly 15% Thursday.

"There's a huge number of attributes that we find correlate with Stitch Fix and being able to deploy them, not just in terms of how we're mapping products for clients once they're in the service, but to be able to use that in identifying good clients, is a strength that has been a newer strength for us," CEO Katrina Lake said Thursday on CNBC.

Lake said the data it collects from users is "super valuable" and helps Stitch Fix better identify clients "that we know we're going to be able to serve best" and would be a good match for the company. The data has helped the company remain virtually unharmed by the wreck that has hit the stocks of apparel retailers recently.

As of the end of last week, apparel retailers' earnings, as a group, were down 24% for the first quarter of 2019, according to an analysis by Retail Metrics.

"I think to be able to have a focus strategy around 'How do you acquire clients that are going to be great for your service?" versus 'How do you just acquire as many clients as possible?' is definitely the strategy that we employ," Lake said.

Stitch Fix's active clients — people who received a box of clothing in the preceding 12-month period — came in at 3.1 million, an increase of 17% year over year.

In the second quarter of fiscal 2019, the company launched its new algorithm application that allows it to predict product demand by using data they obtain from styling reviews and quizzes on the app. Lake partially attributed the company's strong performance that quarter to the algorithm.

Stitch Fix said it strengthened its men's business by increasing its product assortment and adding more exclusive brands to its selection.

The company also credited its year-old service Style Pass for improving client retention, growing average revenue per client and increasing client satisfaction compared with non-Style Pass clients. The service offers unlimited styling for a yearly $49 fee, which is credited toward items a client purchases. Stitch Fix said renewal rates for Style Pass were 70% across its men's and women's business. The service is only available for select clients at the time.

For the third quarter ended April 27, Stitch Fix said net income dropped to $7 million, or 7 cents a share, from $9.5 million, or 9 cents a share, a year ago. Analysts predicted results at a loss of 3 cents per share, based on a poll by Refinitiv.

Stitch Fix has posted seven consecutive quarters of more than 20% growth in revenue since it became a public company in 2017. Sales in the third quarter of 2019 grew 29% to $408.9 million, widely beating the $394.9 million analysts expected.

The company raised its revenue forecast for 2019 to a range of $1.57 billion to $1.58 billion, up from previous estimates of $1.53 billion to $1.56 billion. For the fourth quarter, revenue will be between $425 million and $435 million.

Adjusted EBITDA will be between $5 million and $10 million in the fourth quarter and between $38 million and $43 million for the year.

The company, which has a market cap of $2.7 billion, has seen its stock surge more than 55% since the start of the year.