Stitch Fix reported its Q2 earnings earlier this week. Guidance around slower growth in the back half of the year got the most attention—and sent the stock tumbling—but the company’s evolving marketing strategy is more noteworthy. 

The background:

  • Net revenue grew 22% year-over-year.
  • Active clients grew 17% year-over-year to over 3.4 million. 
  • Net revenue per client (the closest thing it reports to AOV) grew 8.3%, and 2% of this was because the year had one more week in it, which makes the actual number only 6.3%. 
  • Less than 9% of all advertising spend was brand-related, meaning the vast majority was focused on performance.

Starting in 2017, Stitch Fix ramped up its paid marketing spend as it needed to grow beyond the nearly 2.2 million active clients it had when the company went public. In its fiscal Q1 2018, ad spend increased by 84%, part of a bigger focus on brand advertising channels like TV and radio. In the back half of 2018 and early 2019, ad spend swelled to $62 million, and then again to $86 million in late 2019 and early 2020. This still represented less than 8% of revenue, up less than 1% from 2017. 

But for the rest of 2020, Stitch Fix said it was pulling back ad spend for a few reasons:

  • Starting in 2017, as Stitch Fix grew outside of its initial customer base, it started naturally attracting more promotional customers who were on the hunt for cheaper products. The company had to expand its product offering to cater to them and now sells more lower-priced items than ever before.
  • The company cited rising acquisitions costs in the market, especially on Facebook, which are making its marketing investments less efficient. 
  • Stitch Fix recently introduced the option for customers to buy individual products, not just a box of items (a Fix), which will start to evolve its business. While the company had a big brand marketing push planned for the back half of 2020, it’s holding off so it can get its messaging and product right for the investment to be worth it. 

Stitch Fix said all of this while customer acquisition costs have remained relatively flat, which is good. From a product perspective, 50% of the company’s revenue in its men’s business comes from private labels, which helps keep margins high. The company also says that plus size is a big focus for its women’s business, which should also mean cheaper customer acquisition since fewer brands are competing for this audience, which remains a big opportunity. 

Overall, Stitch Fix’s business looks generally healthy, even with a big question looming about how turning into more of a data-driven department store and less of a styling box company will affect Stitch Fix’s business. Allowing customers to buy single items is a much better entry point than making them buy a box and Stitch Fix is now in a multi-year process to evolve its business to match this reality. 

Interestingly, this is the exact opposite approach Le Tote (a styling service) is taking with Lord & Taylor (the legacy department store it bought last year). Le Tote bought a department store to suddenly expand its customer base and change the nature of its business. Stitch Fix, on the other hand, is slowly evolving into more of a department store without the need for an acquisition.    

While adjusting its marketing spend risks a short-term decline in sales now, which Stitch Fix is expecting, the move will be worth it if Stitch Fix can reposition itself correctly for the next few years. Either way, running a consumer brand, at scale or in the beginning, is only getting more expensive.