Dive Brief:

• A late-pandemic apparel market recovery helped Stitch Fix finish its fiscal year on solid ground. Net revenue in the fourth quarter rose 29% year over year to $571.2 million, with the number of active clients up 18% to 4.2 million, according to a Tuesday filing with the Securities and Exchange Commission.

• The apparel retailer swung into the black in the quarter with net income of $21.5 million, but finished off its full year in the red, with an $8.9 million net loss, per the filing. Ending inventory was up 70% year over year, Chief Financial Officer Dan Jedda told analysts.

• Stitch Fix plans a marketing blitz to promote its direct buy option, now known as "Freestyle" and newly open to all consumers. The option is key to growth, executives said during a conference call Tuesday, though Jedda noted it also opens up the retailer to a greater need for clearance pricing.

Dive Insight:

Stitch Fix seems excited by the potential of consumers buying apparel from its website.

The company's original disruptive idea was to send boxes (or "fixes") of apparel items, curated in tandem by algorithms and human stylists, to subscribers. Now it is leaning into what it had called "direct buy" and is now branding as "Freestyle," — a more recognizable form of e-commerce.

"Clients have agency, flexibility and choice, while also experiencing a highly personalized shopping experience," CEO Elizabeth Spaulding told analysts, adding later, "Our strategies of innovating through Freestyle, expanding into new categories and price tiers, and eventual geographic growth into new markets, gives us a significant runway for growth ahead. Specifically in fiscal year '22, we will enhance and broaden our Freestyle offering in numerous ways."

That includes allowing stylists to include items from a client's Freestyle cart in a fix; the creation of 200 or more branded shops; "an updated brand story;" marketing tools like product listing ads; and experimentation "with influencer and affiliate partnerships."

The company also plans to leverage search through what Spaulding called "curated search," though it's not clear whether that means search capabilities will be added to the Freestyle direct buy channel itself, or if she was referring to browser-based search that would pull up targeted ads. At the moment, in order to buy via Freestyle, a shopper must sign up with Stitch Fix and browse by category, department or brand, but cannot search the site.

The upcoming advertising spend that will go toward marketing Freestyle is one reason executives gave for the company's muted outlook. Stitch Fix expects its first quarter net revenue to rise between 14% and 17% year over year, and its full year revenue to rise 15%, per its release.

That's "a headscratcher for a company whose [total addressable market] should be explosive this year, and comes despite an 18.3% increase in active clients last year, improved [average order value] through its Fix preview capabilities, and the Freestyle launch," MKM Partners Managing Director Roxanne Meyer said in emailed comments Wednesday.

The new option is also giving some analysts pause. Wells Fargo analysts led by Ike Boruchow reckon that Freestyle "could ultimately" drive more than $350 million in revenue over the next five years, but warned it's "a bit of a mixed bag" because some fix clients, who forfeit a $20 styling fee if they don't keep any of the boxed items, will just switch to buying from the site.

"While adoption of the offering seems to be strong (~30% of active clients have tried the offering), our concern is whether it could become more cannibalistic over time," they wrote in emailed comments Tuesday, reiterating their previous observation that Stitch Fix benefited little from e-commerce's pandemic-related rise, yet now seems to be missing out on much of the current apparel sales boom.

Stitch Fix may be hoping that operating more like a regular apparel company will help it grow. But it could be further disrupted by an even more conventional retail model: brick-and-mortar stores. Last year, the company's previous chief operations officer said that, after testing the channel, physical locations are "not for us."

"Essentially, if apparel demand starts shifting back to physical stores, then [Stitch Fix] wouldn’t necessarily see a significant improvement in trends," Wells Fargo analysts said. "In other words, the key question here is 'If the business was weak when consumers were unable/unwilling to go to physical stores, why would it be better when consumers are willing to go back to stores?' As a result, we think there is meaningful uncertainty about [Stitch Fix's] recovery prospects post-COVID."