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Stitch Fix Shines: Is Direct Buy Facility the Only Catalyst?

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Stitch Fix, Inc. (SFIX - Free Report) looks well-poised on its strategic initiatives. The online personal styling service company is benefiting from its robust efforts to improve client experience and continues to invest in digital capabilities. The company’s ‘direct buy’ service is worth a mention.  Over the past three months, this Zacks Rank #3 (Hold) stock has surged 79.5%, rallying ahead of the industry’s 32.4% growth and the S&P 500 Index’s 21.1% rise.

‘Direct Buy’ Steals the Show

Speaking of the company’s digital capabilities, Stitch Fix’s ‘direct buy’ facility, which was introduced last year, has been gaining massive popularity. This integrated facility allows clients to shop and select products directly from the company’s website or mobile app with highly personalized recommendations. Impressively, Stitch Fix’s direct-buy revenues more than tripled quarter over quarter in the third quarter of fiscal 2020, gaining momentum each week. Also, this capability largely contributed to net merchandise revenue growth in the fiscal third quarter. Moreover, direct buy’s penetration into the existing female client base increased from 5% in February to 13% in May.

Management continues to expand the “direct buy” facility to capture market share. In order to make the facility an important client-acquisition tool, management introduced Trending For You in early June. This new feature allows male and female clients to shop for hyper-personalized looks. The latest offering designs more shoppable looks, largely expanding the breadth of items on offer and removes the previous purchase requirement. Management cited that direct buy’s “low commitment and low friction path to a personalized shopping experience represents an important gateway to Stitch Fix”.

Recent Performance

The company reported a wider-than-expected loss and sales miss for the fiscal third quarter of 2020. Both the metrics deteriorated year over year. Results were mainly hurt by warehouse disruptions from COVID-19. Still, the company managed to register the eighth successive quarter of revenue growth per active client. On its third-quarter fiscal 2020 conference call, management informed that the company has been witnessing meaningful improvement in its top line over the past weeks. In April, net merchandise revenues improved week over week. This momentum continued in May with year-over-year growth in the metric. These trends are likely to continue in the fiscal fourth quarter.

All in all, Stitch Fix seems to be a bright spot now given the strength in its digital initiatives, the direct buy facility in particular.

Key Picks in Retail

Sprouts Farmers Market (SFM - Free Report) has a trailing four-quarter positive earnings surprise of 37.2% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SpartanNash (SPTN - Free Report) , also a Zacks Rank #1 stock, has a positive earnings surprise of 76.3% for the last reported quarter.

Dollar General (DG - Free Report) has a long-term earnings growth rate of 12.4%. Currently, it carries a Zacks Rank #2 (Buy).

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