This isn't going to be yet another apocalyptic pandemic-related tale. Retail is not dead, but evolving thanks to technological innovation.

Although it saw its stock drop 60%, just like department stores Nordstrom Inc. (NYSE:JWN), Dillard's Inc. (NYSE:DDS) and Macy's Inc. (NYSE:M), Stitch Fix (NASDAQ:SFIX) also saw its prices higher by nearly 20% throughout this unprecedented year.

Stitch Fix is the leading brand taking advantage of online personal styling trends. It is a new business that seeks to disrupt apparel retailing through a subscription selling approach that relies on technologies such as machine learning. There's a lot of potential growth in the industry, which is why Amazon.com, Inc. (NASDAQ:AMZN) launched its own Personal Shopper by Prime Wardrobe last summer.

The secret behind Stitch Fix

Stitch Fix's business model mitigates inventory buildup as the data predicts the customer will want. Over time with more items being kept or returned, the predictive algorithms improve and provide the company with valuable knowledge with which it knows exactly when it needs to have items in stock. The good news is that despite the damage from the pandemic, the company is still enjoying robust engagement levels, which adds weight to management's explanation that the recent slowdown was a result of supply challenges rather than demand issues.

Performance

Last fiscal year, Stitch Fix's net revenue rose 29%. Despite deceleration, revenue grew by better than 20% through the first half of fiscal 2020, but it stumbled in its latest quarter that ended in early May. The most recent quarter saw the company bleeding cash, with a drop in revenues and profit. Net revenue dropped 9% compared to the same period last year as it amounted to $371.7 million. However, Stitch Fix managed to grow its active client base by 9% as well to 3.4 million over the past year.

The company is no longer providing guidance, but it did point out in early June that it expects a positive year-over-year net revenue growth for the fiscal fourth quarter. Its CEO Lake said in June that the company is ready to play offense and battle the consequences of lockdowns.

Limitation

Stitch Fix's scalability is constrained to the productivity level of its stylists. This could improve with further AI developments, but for now, it is the limiting factor. But its major concern is the vulnerability to external shocks as it failed to capture the accelerated online trend during the pandemic. Therefore, the pandemic only amplified existing growth issues that the company had before the pandemic.

How Amazon measures up

Amazon isn't putting too much effort on its Stitch Fix alternative simply because it doesn't have to. Amazon is the undisputed emperor of online retail. Stitch Fix's $1.7 billion revenue that it generated over the trailing four quarters is merely 0.5% of Amazon's $322 billion during the same period. This is where the comparison ends.

Outlook

Online personal styling was a booming niche before the pandemic with plenty of growth potential. Without COVID-19, online penetration was expected to rise from 25.2% to 40.3% in 2024. The pandemic pulled online retail fast forward a few years. This trend does benefit Stitch Fix but working and spending so much time at home do not encourage consumers to get new outfits. The combination of these two trends makes it difficult to give any sort of forecasts.

Tale of two tailors

Merchandising has shifted to algorithms that can provide a personalized mix of products to suit a consumer's unique taste and attributed.  But as big as Amazon may be, it's actually growing faster than Stitch Fix as its net sales rose 40% in its latest quarter.

The pandemic did inflate Amazon's latest report, just like it deflated the operational results of Stitch Fix. However, if we look at the two previous quarters combined, figures are fairly even, with Amazon only being slightly better with its top line growing slightly better than 23% and Stitch Fix just below 22%. Stitch Fix has an edge in gross margin, but its model has too many cost layers that drain profits. Amazon's biggest strength is that it is a well-diversified leader across several different businesses.

Stitch Fix is a worthy consideration for risk-tolerant investors, but Amazon remains the mother of all e-commerce stocks. At least for now. We will know more about its offensive when it releases its financial results for its fourth quarter and full fiscal year 2020 ended August 1, 2020 after market close on Tuesday, September 22, 2020.

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