Stitch Fix CEO breaks down how data science and algorithms drive success

Yahoo Finance's Sibile Marcellus spoke with Stitch Fix CEO Elizabeth Spaulding about how the company utilizes data science and algorithms to drive business.

Video transcript

SIBILE MARCELLUS: Elizabeth Spaulding is the CEO of Stitch Fix, the online personal styling company that caters to all ages and genders. But don't call it another run of the mill e-commerce outfit. Data science and algos drive the styling and shopping experience at Stitch Fix. Spaulding says data science isn't just part of the business, it is the business.

Elizabeth Spaulding, CEO of Stitch Fix, welcome. In the latest quarter. Stitch Fix reported a profit revenue, increased 29% year over year, and revenue per active client surpassed $500 for the very first time. How did algorithms and data science play into that in terms of the recommended styling options that many users chose to purchase and wear?

ELIZABETH SPAULDING: Well first of all, thank you Sibile, for having me today. Excited to tell our story. Absolutely. Data science and algorithms have been at the core of Stitch Fix from the very beginning. The vision of the business was to take the power of data science, algorithms and creative human judgment, to curate a unique set of items for each of our clients one on one.

The original model of Stitch Fix was taking a few data points from each of our customers, understanding their style preference, their fit, their price preference, brands they loved, and use the power of our data and algorithms together with the human touch of stylists, to just send five items to each customer. And over time, we have increased the keep rate of those fixes every quarter on record, achieving a business that was north of $2.1 billion in our fiscal year that just ended early August.

And the power of that data science is really powered by multiple things. We have a 10 year advantage here. To give a few examples of where that data comes from, we send items to clients. They keep some, they send some back. But 85% of the time on each of those items, we're getting multiple points of feedback. Many of our clients play around with a widget in our app called Style Shuffle, where you essentially thumb up and thumb down items and outfits.

A million clients play that every month. We have over nine billion data points. That is generating just such a rich understanding of consumer preference. And I like to think about the last 10 years of our Stitch Fix history as very much like our DVD era. We've been sending five item racks of clothing, unique and recommended to each of our consumers, and now we're moving into our streaming era of personalized shopping.

And COVID for our category, really offered-- ushered in dramatic change. We were about 25% as a category online, shifting one to two points a year, and we're now 40% online. And so this has allowed Stitch Fix to really embark on our next chapter, which is personalized shopping, and being able to do that same experience but in an on demand streaming fashion where every one of our clients has their own unique personal store.

SIBILE MARCELLUS: And Elizabeth, corporate America has been giving office workers mixed signals. On the one hand, you have many companies that are requiring their workers to be in the office in person, or else. And then on the other hand, you've got companies that are willing to give workers the option to work from home on a permanent basis. So as people navigate all of this, what kind of clothes have they been picking for work? Are men still wearing the same suits they were going for prior to the pandemic?

ELIZABETH SPAULDING: One of the great aspects of our model is the amount of data and insight we get on consumer preference and what people are wearing. So at the beginning of COVID, Sibile, what we saw not surprisingly, was this huge increase in work from home and comfortable clothes. We saw a 10x increase in our stylists' notes of comfortable clothing.

And now that we're entering this moving back to work a hybrid work era, what we saw over the summer months, we saw button downs trending in our men's items. We saw a desire to go out again and bright, bold colors. We saw the desire for more going out clothing and a wardrobe refresh was up 50% in our client request notes.

But I think undoubtedly, consumers want to be comfortable. We talk about this next chapter of shopping as business comfort, when people are going back to work. Our athleisure business was up over 300% year on year over the summer, even though that had already characterized the beginning of COVID. So we think that's a trend that's here to stay. So as men and women go back to work, often in a hybrid mode, the might be looking for blazers again, but it's knit, comfortable clothing, rather than maybe the level of structure that they were wearing pre-COVID.

SIBILE MARCELLUS: And as CEO, you're overseeing the online shopping and styling experience of many of your clients as they try to navigate this evolving workplace environment. But you're no stranger to the challenges. What have you been offering your employees at Stitch Fix? What are the different work modes that you have available?

ELIZABETH SPAULDING: One of the advantages that we saw just even going into the crisis of COVID, navigating the challenge of moving into this era, was that our work modes were already very hybrid. So our styling community, for example, is 100% remote. Those folks work from home seven days a week, flexible hours. We also had a large percentage of our technology teams that were already remote and distributed. And so we were able to adapt relatively quickly to this idea of Zoom calls, and hybrid work was not new to the company.

That said, I think a number of our headquarter functions that typically were more in the office four to five days a week, realize that working from home has its advantages. And the desire to ultimately have the benefit of connecting in person, we have an incredibly strong culture at Stitch Fix of authenticity and inclusion, and people really enjoying being together. But also people realize like this is a new model where we can work from home multiple days a week.

So one of the things that we did back in early summer was we announced a number of different work modes that for many of our employees, if the work caters to that flexible mode, we allowed people to opt in. We have pushed back our office reopening date in the US. Our UK is now fully open, but the US will push back to early January. But for all of those roles, many folks I think are going to be more two to three days a week in office or maybe commutable and coming in a week a month, relative to what it looked like before. And I think what we're excited about is that means our recruiting is more national and more distributed, our ability to be even more inclusive of who we're bringing into the business. So we feel fortunate that the company has been able to adapt and had a lot of that groundwork laid before COVID.

SIBILE MARCELLUS: And over the past year, Stitch Fix has passed $2 billion in annual net revenue for the very first time. Now, in September, you expanded your offerings to offer Stitch Fix Freestyle. How does Freestyle make the online shopping experience more like picking clothes inside a department store?

ELIZABETH SPAULDING: Well, the fixed model as I mentioned Sibile, was the first era Stitch Fix, where we were helping our clients with styling services through people getting it monthly, quarterly, on demand when they wanted to. But what Freestyle does is it's your own personalized store. You can open up our app or our mobile website experience, and we are dynamically generating a home feed and a shopping feed of looks just for you.

So Sibile, if you were to open up our app relative to me opening it up, we would both see very different things. A big part of Stitch Fix is styling and styling services. So it's not like typical e-commerce where you're searching and filtering and trying to find things that are relevant for you. We are showing in a curated fashion, things just for you. And the nature of outfits for example, we are dynamically generating outfits based on items you love or items that you might have purchased with us in the past, we'll show you other looks to go with it. It's dynamic. So we're refreshing it regularly throughout the day based on the inventory that's available, new brands and offerings that we've added to our catalog.

And so what we believe that this does for us is it opens up the full total addressable market for Stitch Fix. A close to half a trillion dollar tam of fashion in a category that is moving away from stores and moving online. And many people talk about personalization and recommendations, but that has been our core DNA from day one and is now available on demand in a way that is radically different and unique, where each customer is walking into their own personalized store.

SIBILE MARCELLUS: And Elizabeth, what are your expectations for Stitch Fix Freestyle? Do you expect that it could possibly transform e-commerce and the way we shop online?

ELIZABETH SPAULDING: Absolutely. We envision that we are creating the blueprint for the future of retail. So much of what e-commerce has been is search and scroll and it's inconvenient. We know that over 3/4 of consumers have frustration with the e-commerce, even though they're moving towards it. It's not perfect. There's a lot of frustrations. Think about going to a website where 95% of it is irrelevant to you and you're doing all the work to search for what's relevant.

And so there are three or four characteristics that we think about in terms of shaping the future of retail and the future of shopping. First, is the point I was making of moving from search and filter to browse and discover. The way that Freestyle works is we're making it a browser shoppable experience, where we've curated to your preferences. We're leveraging our style graph, which understands from our millions of customers what style preference really looks like if you've told us a few styles that you love. That is a very different idea.

The second is dynamic and real time. Leveraging consumer feedback on a real time basis. I mentioned that the items we ship, we're constantly getting feedback. That thumbs up and thumbs down rating system. Many of our clients are coming back daily or a few times a week and giving us more feedback so we can make that experience better and better and better for them.

The third is around inclusivity. A lot of fashion historically has really left people out and our focus is around inclusivity and this being right for each individual consumer and a mission. We've dramatically grown our business in the last two years. As we think about brands that we on board, making sure that there's great representation. So those are a few of the characteristics that we think will define the future of retail and are very much what is defining how we are building and expanding our Freestyle experience.

SIBILE MARCELLUS: And Elizabeth, as you continue to push the envelope when it comes to online shopping, I'm curious about one thing. The skinny jeans in my closet. Many people have them. Is that style making a comeback or is that just so pre-pandemic?

ELIZABETH SPAULDING: Straight leg is now trending, but I think there is nothing wrong with skinny jeans. I personally am a huge fan. But we are seeing growth in that straight leg as part of our assortment. We're seeing growth and requests for it. But I think you're still safe with the skinny jeans.

SIBILE MARCELLUS: That's great. And in terms of styling trends going into 2022, what can we expect?

ELIZABETH SPAULDING: Absolutely. I think this movement towards business comfort I think is one. I think we are still seeing tremendous growth in footwear and casual footwear with sneakers and comfortable shoes. But also going out again. I think people want to get dressed. They're ready to have fun. I mentioned, some of the things that we saw over the summer months, I think we're going to see in the months coming forward with the holiday season. We saw a big run on jumpsuits and rompers in the spring. I think we're going to see more of that with bold colors and dresses for women in the winter months.

And also, men starting to go back to work, but maybe not as frequently. Maybe it'll be more hybrid mode. So I mentioned that trend of button downs. And we've made a big push into just more comfortable, structured clothing, rather than what might have been attractive but less comfortable in the past. And so I think that, that movement towards looking good but also feeling good is a shift that we expect to stay.

SIBILE MARCELLUS: And for those who may choose to work permanently from home, what styling choices do you think that Stitch Fix will be recommending for them?

ELIZABETH SPAULDING: Yeah, I mean, we always see a lot of growth in the fall season in booties. But I think if you're working from home, we have a lot of great athletic footwear, lifestyle based sneakers and brands. We also if you are working from home and really comfortable, we've got lots of great slipper options and things that are less visible, with the top half on the camera. So I think a combination of all of those are great options.

SIBILE MARCELLUS: Well, thanks so much for those recommendations. Elizabeth Spaulding, CEO of Stitch Fix. Great to have you on. Thanks so much.

ELIZABETH SPAULDING: Thanks, Sibile.