Why Stitch Fix Could Be the Next Netflix

The market doesn't quite know which box to put Stitch Fix Inc (NASDAQ: SFIX) in. It sells clothes, but it's not a traditional retailer, nor does it feel quite accurate to call it an online retailer even though its business is based on e-commerce. It claims its data-driven model gives it an advantage over the competition, but it's not really a tech company.

The stock it's most often compared to is Blue Apron, another subscription-based delivery service, but that doesn't seem fair since Blue Apron's six months as a public company have been mostly disastrous. Unlike Blue Apron, Stitch Fix is profitable, growing steadily, and doesn't face the range or caliber of competition that the meal-kit service is up against.

There may be no adequate peer to compare Stitch Fix to, but there's one popular company that the styling specialist does share a surprising number of characteristics with: Netflix (NASDAQ: NFLX).

Like Netflix before it, Stitch Fix is focused on disrupting a giant industry that has not fully embraced the power of e-commerce. Also like the video streaming giant, Stitch Fix's proprietary and data-driven approach gives it an advantage in designing and choosing clothes for its customers. Similarly, Netflix leverages its users' preferences when deciding what types of shows and movies to produce and what to recommend to viewers.

A Stitch Fix box leaning against a yellow door.
A Stitch Fix box leaning against a yellow door.

Image source: Stitch Fix.

Here comes the disruptor

Netflix started out as a DVD-by-mail service after CEO and co-founder Reed Hastings was slapped with too many late fees at the local Blockbuster. Over the years, that innovation evolved with technology into video streaming and then original production. Netflix has always been focused on using technology to disrupt the video entertainment market. It was a giant opportunity: The domestic entertainment and media market was estimated to be worth $655 billion this year, with the global market valued at about three times that.

Similarly, Stitch Fix CEO and founder Katrina Lake says she started her company because traditional clothes shopping, both in-store and online, was too time-consuming. Both demand that the consumer shuffle through dozens of items, and it was too hard to find items she liked that fit well.

So she used the power of the internet and improvements in package delivery to create a personalized styling service that sends clothes directly to customers based on their preferences. Customers can then buy the clothes or send them back. Since launching, the company has expanded into new categories like menswear and plus size, partnered with luxury labels, and, most importantly, launched its own private label exclusive brands, which it says contribute a higher margin than its other categories.