Daniel Shinar

@danielshinar

5 Learnings from Stitch Fix IPO Prospectus

In 2011, Katrina Lake (34) was in her second year at Harvard Business School. In a small Boston apartment, she dreamt of providing personal fashion assistant to everyone. Six years later the company she founded, Stitch Fix, is going public, with over one billion USD revenue run rate, positive EBITDA and over two million active customers.

What is it all about?

Stitch Fix is about bringing back a piece of the fashion retail experience that was somewhat lost in the migration to e-commerce — personalization. Missing styling tips from in-store staff in your e-commerce experience? Stitch Fix is for you — submit data (size, fit, price preference, style), chose shipment interval and get your “Fix”.

This is how it looks

The 5 item Fixs are the combined effort of data scientists (~75) and algorithms enhanced with insights from troops (~3,500) of part-time stylists. Customers receive the Fix, choose items they like (and only pay for those) and send the rest back. Feedback is collected and returns are analyzed to improve customer experience and Fix fit. Each Fix is charged $20, which are credited towards purchases and if a customer keeps all 5 items — she gets a 25% discount.

Financials

Source: Stich FIx S-1

In 2017 (the company’s fiscal year ends in July) the company had $977 million in revenue, representing year-over-year growth of 33.8%. The company had net income of $33 million in 2016 and a net loss of $1 million in 2017, and reported $73 million and $61 million in adjusted EBITDA in 2016 and 2017, respectively. The company has 2.2 million active clients[1], representing year-over-year growth of 31%.

Stich Fix CEO, Katrina Lake

Stitch Fix disclosed limited cohort data, making it difficult to fully understand the health of its business. What we do learn is that customers spend more in the first six months of the service than the next six months, and similarly spend more in the first year than the second year. This could mean that customers are getting tired or bored with the service, and that the company has to push harder for more innovation and engagement. On the positive side, it seems that with time the company improved its offering as there is growth in the average number of items purchased per Fix:

Percentage growth in the average number of items purchased per Fix during each respective year compared to the average number of items purchased per Fix in 2014. (Source: Stich Fix prospectus).

The company does not disclose churn data but it did disclose that 86% of its revenues in 2017 (83% in 2016) came from repeat customers.

Valuation

The company didn’t disclose its valuation expectations, but we do know that it bought shares from employees last year at a $2bilion valuation (Lake sold shares for one million usd), which would be in line with the 2X revenue multiples of on-line fashion companies such as Asos and Zalando. But, According to Reuters the company could be looking for a $3-$4b valuation, which means they will try to sell the story as a data/tech company vs normal e-com business.

The most interesting things I have learnt from the prospectus:

1. We grow profitably, get up everybody and sing

In the 12 months ending in July 2017, the company had net revenues[2] of $977m, with a gross profit of $434m (44.5%). The gross margin is in-line with other e-com fashion companies at larger scale. Operating income was 3.3% of revenues, down from 8.8% in 2016. The company says it was cashflow positive since 2014 and had positive EBITDA in both 2016 and 2017. In 2016 the company was profitable. In 2017 it went back to the red, mainly because of increased marketing spending. Advertising spend increased from $25 million in 2016 to $70.5 million in 2017.

2. Amazon WHO?

Searching the prospectus for the word Amazon yields only two results — none related to competition (unlike the word data which appears 229 times).

“We compete with department stores, specialty retailers, discount chains, independent retail stores, the online offerings of these traditional retail competitors and eCommerce companies that market the same or similar merchandise and services that we offer”.

The above is the prospectus section about competition, as you can see nothing about the giant from Seattle. While Amazon Wardrobe is considered by many a direct and imminent threat to Stitch Fix, I tend to agree with the company it is not. The Stitch Fix fashion experience, powered by 3,500 stylists and a 34 year old fashionista founder, is miles apart from Amazon’s.

3. Oh, THAT Amazon!

So what were the two mentions of Amazon in the prospectus if not competition-related? One was the company’s CTO’s resume — Cathy Polinsky spent some time in Seattle. But the more interesting mention of the A word (no offense, Cathy) is in the risk factors sections, under System interruptions:

“…we have experienced interruptions in the past. For example, in February 2017, as a result of an outage with Amazon Web Services, where much of our technology infrastructure is hosted, we experienced disruptions in applications that support our warehouse operations and order fulfillment that caused a temporary slowdown in the number of Fix shipments we were able to make”.

Like Netflix and many Amazon retail competitors, Stitch Fix is also dependent on AWS for its infrastructure. Other retailers such as Target opted to leave AWS because of the retail-side competition, according to press.

4. Float like a Butterfly, Sting Like a Bee (Muhammad Ali)

Efficiency. Efficiency is usually defined as the ratio of the useful work performed in a process to the total energy expended. Stich Fix redefines efficiency in e-commerce — a normally capital intensive industry. The company scaled to a billion dollar revenue business in a few years, with only $42.5 million of equity. If we assume a valuation of two billion, that’s only 2% of the company’s value, or 1% if the valuation reaches the rumored $4b (which sounds way too high to me at 4X revenue multiple, but who knows). This is unique. Raising so little capital must have pushed Lake and her team to be very efficient and effective in marketing, without spending too much on customer acquisition, which often happens at heavily financed e-com startups.

5. Who run the world? Girls! Girls, we run this motha (yeah!) (Beyoncé )

If you have read this far and have two eyes, by now you understand Stich Fix was founded by a woman (actually two women, Erin Morrison Flynn co-founded the company with Lake). But you might not know that 55% of the company’s management team and half its board of directors are women. This isn’t very common in the Silicon Valley. Stitch Fix has over 5,800 employees, including over 3,400 stylists (many part timer), 1,500 full time fulfillment center employees, 200 client experience employees, 95 engineers and 75 data scientists. Now for the final number: over 86% of the company’s employees are female. Who runs the world then? Yeah.

CommerceWars summary

Some say it’s a fad, some it’s here to last. I believe it’s the latter, but who knows? All I know is that in the Amazon Era, to start an ecom company is challenging. To survive as an ecom company is even more challenging. And to grow to a billion usd in revenues, profitably, with only $42.5m in capital raised — that’s just f##n awesome. Fingers crossed for the IPO to succeed and bring some fresh energy and hope to the many small players trying to survive the CommerceWars.

What do you think? Is Stitch Fix here to stay? Or is it a fad? Or maybe it will be eaten by Amazon like Diapers.com and Zappos?

.:.

[1] Customers who used the service at least once in the previous year

[2] revenues, excluding the impact of styling fees, sales tax, refunds, gift cards, referral credits and clearance sales

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