Author Topic: SFIX - Stitch Fix  (Read 19952 times)

KJP

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Re: SFIX - Stitch Fix
« Reply #10 on: December 30, 2018, 07:10:28 PM »
I took a quick look at the Stitch Fix and Nordstrom 10-Ks and their reported gross margins are not apples-to-apples.  The details are below.  So, is my speculation that SF is selling a higher percentage of its clothes at full price even correct?
 
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Nordstrom's COGS include "buying and occupancy costs," which are defined as follows: "Buying costs consist primarily of compensation and other costs incurred by our merchandising and product development groups. Occupancy costs include rent, depreciation, property taxes and facility operating costs of our retail, corporate center, fulfillment facilities and distribution operations."

In contrast, Stitch Fix appears to record most of those costs SG&A.  Specifically, SF limits COGS to "the costs of merchandise, expenses for shipping to and from clients and inbound freight, inventory write-offs and changes in our inventory reserve, payment processing fees and packaging material costs." 

SF includes the following in SG&A:  "compensation and benefits costs, including stock-based compensation expense, for our employees including our stylist, fulfillment center operations, data analytics, merchandising, engineering, client experience, marketing and corporate personnel. Selling, general and administrative expenses also include marketing and advertising, third-party logistics costs, facility costs for our fulfillment centers and offices, professional services fees, information technology and depreciation and amortization."

So, on an apples-to-apples basis, the gross margin difference between SF and other retailers may not be as large as my prior post suggested, though SF must be recording in COGS much higher "shipping to consumer" costs as a percentage of revenue than Nordstrom.
« Last Edit: December 30, 2018, 07:12:57 PM by KJP »


ajc

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Re: SFIX - Stitch Fix
« Reply #11 on: December 31, 2018, 05:12:02 AM »


So, on an apples-to-apples basis, the gross margin difference between SF and other retailers may not be as large as my prior post suggested, though SF must be recording in COGS much higher "shipping to consumer" costs as a percentage of revenue than Nordstrom.



You're right. TechCrunch analyzed the same thing in their IPO breakdown - https://techcrunch.com/2017/10/22/unboxing-stitchfixs-s-1/

Goodwater Capital also did a detailed Stitch Fix write-up on their model and the overall industry, with comparison data included - https://www.goodwatercap.com/thesis/understanding-stitch-fix

I think Stitch Fix hybrid designs (in-house productions that are among their best-sellers) could potentially be a big deal for the business and margins down the road (38min30secs in this video - https://www.youtube.com/watch?v=z_OGYzT_MBo).
That'd be a way for them to make themselves more self-determining like a Zara, rather than relying on outside brands. Their individual preference data for fit, style, etc, would clearly be a significant differentiator and advantage if that happened.



clutch

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Re: SFIX - Stitch Fix
« Reply #12 on: December 31, 2018, 08:55:37 AM »

"This, together with Amazon's AI difficulties, will probably ensure that Amazon stays behind Stitch Fix in this market even if they'll have more volume."

What's your basis for saying that Amazon has AI difficulties? Amazon probably hires 10x more PhDs in machine learning than this company... considering they also have more volume (data) it seems like they'd have much bigger advantage in AI.


So, in 2015 Stitch Fix actually had a bigger data science team than Apple, LinkedIn, Twitter, Google or Amazon (https://www.mercurynews.com/2016/12/15/computing-out-fit-stitch-fix-algorithms-machine-learning-dress-customers/) and that team has grown by over 30% since then. Furthermore, data science and AI is part of the Stitch Fix core and is what the company was built around.

Amazon, while strong in that area, was really built as a shopping website backed by an innovative warehouse and logistics operation (that was my sense when I worked there). Obviously, they later opened their physical and computing infrastructure to others.

While I'd argue Amazon is pretty decent on the AI front, to my mind their forte was much more in building practical industrial size hardware and software systems that could scale quickly and robustly. My 2 cents is when it comes to nuance, Amazon is not really the same as a Google or a Stitch Fix. It's like comparing Noma to McDonalds. Both do what the other can't, but if you figured out a way of scaling Noma it'd sound odd to say McDonalds has the better food production techniques. It depends on what you're after and for Stitch Fix there are enough people who want a more deeply personalized, stylist-based experience.

I'm not sure if you're aware, but Amazon Prime Wardrobe is not like Stitch Fix even though analysts peg it as their greatest threat (incorrectly to my way of thinking). With Prime Wardrobe you click on a bunch of items you like, choose your own sizes, styles, etc, and they get shipped to you. There's no personalization and Amazon has no deep preference data for you. Essentially, it's more of a quick and easy shipping service on top of the current retail store format where there are racks full of stuff you sort through yourself. Amazon is not really in the business of intricate personalization, and as good as they are generally it might be tough to teach an adult dog such new and different tricks.

A few obvious examples of where Amazon falls darn short on AI ability for the consumer side, can be found here - https://worldwideinterweb.com/funniest-amazon-recommendations-gallery/. I don't doubt all of us have experienced that. Also, if you buy a toaster they'll recommend you a hundred different other types of toaster over the following month. That's another one most people can relate too. Then there's the clear problem they're currently having with fake reviews which their AI is not good enough to pick up and delete. Not to be too hard on Amazon here, but some of this stuff is just about getting the basics right.

Anyway I don't think Amazon is terrible or Stitch Fix is perfect, but I'd say for anyone who looks at who has the better consumer facing recommendation AI, it's clear Amazon still has some completely obvious stuff they need to take care of before they can be taken really seriously on that front.

This is a great presentation about where Stitch Fix's currently is on this - https://www.youtube.com/watch?v=z_OGYzT_MBo

Things have changed since last time you were in Amazon:
https://www.wired.com/story/amazon-artificial-intelligence-flywheel/
https://www.forbes.com/sites/blakemorgan/2018/07/16/how-amazon-has-re-organized-around-artificial-intelligence-and-machine-learning/#7d38a68a7361

The important thing is that they have all of the data, infrastructure, and talent. There's then the AWS factor. If any company wants to implement an AI/data science pipeline in a scalable manner, probably the easiest option nowadays is to implement the solution on AWS using their services and Lamda/Step functions. Even Stitch Fix uses AWS:
https://www.cnbc.com/2017/10/19/stitch-fix-amazon-competitor-depends-on-aws.html

Having said all these, I don't have much insight into Stitch Fix. Maybe they do have a better capability to develop AI solutions. And who knows, Amazon might end up buying Stitch Fix in the end, which would be a good outcome for the investment.

cameronfen

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Re: SFIX - Stitch Fix
« Reply #13 on: December 31, 2018, 09:28:20 AM »
It's strange how when a company like stitch fix slaps on the title of data science people buy the company like it's making magic.  As a data scientist, it's basically just like statistics and my guess is it only helps the company on the margins for this task.  I imagine it basically works somewhat worse than a human for picking out clothes you like.  If you assume the robot saved a person 10 mins of hand curation for each order, that's 2.66 an order if you pay 2x minimum wage to a worker.  For orders over 100 dollars, that's a pretty insignificant cost advantage. 

KJP

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Re: SFIX - Stitch Fix
« Reply #14 on: December 31, 2018, 10:33:12 AM »


So, on an apples-to-apples basis, the gross margin difference between SF and other retailers may not be as large as my prior post suggested, though SF must be recording in COGS much higher "shipping to consumer" costs as a percentage of revenue than Nordstrom.



You're right. TechCrunch analyzed the same thing in their IPO breakdown - https://techcrunch.com/2017/10/22/unboxing-stitchfixs-s-1/


The TechCrunch article's analysis is hard to follow.  It says that traditional clothing retailer gross margins [which the article appears to mistakenly equate to "inventory margins"] are around 45%, but the article's chart shows that the truth is closer to mid- to upper-30's.  The only ones above that are brands [Michael Kors, LVMH, Hermes, Coach] rather than pure retailers.  So, the article ought to start from the proposition that SF's reported GMs are higher than other clothing retailers and explain why that is.  But instead, the article seems to then ignore other clothing retailers and assert that SF ought to be compared to other "mature e-commerce retailers," which the article claims have GMs of 55-65%.  Unfortunately, the article contains no information about who these purportedly comparable "mature e-commerce retailers" are nor does it explain why GMs should be the same across all kinds of e-commerce, regardless of the type of product being sold. 

If you're concerned about whether SF's model is based on full-priced sales, then it does make sense to try to see whether (Price received from consumer - Price paid to manufacturer/brand for product) -- which the article seems to occasionally refer to as "inventory margin" -- is larger for SF than, say, Nordstrom.  But the article's analysis doesn't do that, because it only adjusts out SF's shipping costs, but doesn't also attempt to adjust out the "buying and occupancy costs" that retailers like Nordstrom typically record in COGS.  So, the article's analysis is incomplete and misleading if that's what it's trying to analyze.

So, at the end of the day, I don't think the TechCrunch article provides any answers to the underlying question of whether SF's business depends more on full-price selling than other clothing retailers.
 
« Last Edit: December 31, 2018, 10:36:13 AM by KJP »

dwy000

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Re: SFIX - Stitch Fix
« Reply #15 on: December 31, 2018, 10:48:05 AM »
Maybe it's just me but the business model doesn't feel very robust.  Spending $25 to have someone (or a machine) pick out full priced clothing and then having to rebox and take the extras back to the post office doesn't feel like it's a massive time or cost savings (vs just shopping online).  I could see people who don't like shopping using it as an expensive timesaver but I would imagine for most people its a novelty to try and then ditch.  Would love to know the drop off rate of customers from first order to second to third etc.

Also not sure what the moat would be here.  A taste based algorithm that gets better over time requires a ton of orders and is impossible to compare unless you are using multiple services.

Maybe I'm missing the whole plot but it feels like a neat but expensive and unnecessary service that will immediately get crushed in any sort of downturn.

ajc

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Re: SFIX - Stitch Fix
« Reply #16 on: January 01, 2019, 05:32:30 AM »


So, at the end of the day, I don't think the TechCrunch article provides any answers to the underlying question of whether SF's business depends more on full-price selling than other clothing retailers.



I see. I think what you're talking about is being addressed by them from another angle (see https://www.businessoffashion.com/articles/news-analysis/stitch-fix-introduces-over-100-contemporary-brands).
Stitch Fix is using client preference insights and combining with brands to come up with unique lines of fashion that are only sold there.
This, together with Stitch Fix's own in-house hybrid designs, makes it look like they're solving this issue by offering more and more collections that can only be found through them.
The more offerings Stitch Fix sells that are unique and the more brands that use Stitch Fix as a preferred channel for those products, the higher up the chain they can go.

This is another good article on the same thing, focusing deeper on how Stitch Fix and the brands specifically benefit - https://medium.com/@medhaa/stitch-fix-and-amazon-continue-to-dominate-apparel-e-commerce-dcda1a68c0e1
Essentially, Stitch Fix seems to be aware of the risk you're pointing out and is doing what's needed to protect itself from the threat of being just another high-endish channel.
I think in some ways they're actually building leverage over competitors and the industry by using their data and personalization, instead of being on the receiving end.

Related, it's also probably worth flipping the issue of full-price selling and how it's looked at here. I don't doubt you're aware it definitely matters if you're undifferentiated, but if you're way more differentiated and personalized then full price selling is something many clients and brands actually want and expect. Fashion's definitely one of those weird businesses where price itself can sometimes be the most important signal so long as the cache you've built is exclusive and high-end, so I guess I'm trying to keep that in mind for this bet. Stitch Fix sort of looks like it's busy positioning itself in that way.



KJP

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Re: SFIX - Stitch Fix
« Reply #17 on: January 01, 2019, 07:58:38 AM »


So, at the end of the day, I don't think the TechCrunch article provides any answers to the underlying question of whether SF's business depends more on full-price selling than other clothing retailers.



I see. I think what you're talking about is being addressed by them from another angle (see https://www.businessoffashion.com/articles/news-analysis/stitch-fix-introduces-over-100-contemporary-brands).
Stitch Fix is using client preference insights and combining with brands to come up with unique lines of fashion that are only sold there.
This, together with Stitch Fix's own in-house hybrid designs, makes it look like they're solving this issue by offering more and more collections that can only be found through them.
The more offerings Stitch Fix sells that are unique and the more brands that use Stitch Fix as a preferred channel for those products, the higher up the chain they can go.

This is another good article on the same thing, focusing deeper on how Stitch Fix and the brands specifically benefit - https://medium.com/@medhaa/stitch-fix-and-amazon-continue-to-dominate-apparel-e-commerce-dcda1a68c0e1
Essentially, Stitch Fix seems to be aware of the risk you're pointing out and is doing what's needed to protect itself from the threat of being just another high-endish channel.
I think in some ways they're actually building leverage over competitors and the industry by using their data and personalization, instead of being on the receiving end.

Related, it's also probably worth flipping the issue of full-price selling and how it's looked at here. I don't doubt you're aware it definitely matters if you're undifferentiated, but if you're way more differentiated and personalized then full price selling is something many clients and brands actually want and expect. Fashion's definitely one of those weird businesses where price itself can sometimes be the most important signal so long as the cache you've built is exclusive and high-end, so I guess I'm trying to keep that in mind for this bet. Stitch Fix sort of looks like it's busy positioning itself in that way.

I agree that differentiation is essential to full price selling.  I think that's particularly true with clothing, where there are huge price differences between substitute goods driven, in part, by branding.  So, I think what SF is doing is smart.  QVC tries to do the same thing by getting manufacturers to make versions of their product that are exclusive to QVC.

I initially went down the rabbit hole of GM because I was trying to figure out if SF's business model was based on full-priced selling.  After doing more reading (10-K, articles you've linked to, VIC comments), it seems clear that full-price selling is the company's core business model.  It will be interesting to see how big the business can get with that model.

Given the very high churn rates suggested by multiples sources (company comments, credit card data referred to in VIC comments, the Goodwater Capital presentation you linked to early), it seems to me that the more relevant financial metrics for SF are the ones you'd use for a traditional retailer, rather than CAV/LTV and related measures that make more sense for enterprise software companies.  On the surface, SF's metrics (profits, operating margin, etc.) appear to be getting worse.  Why is that?  Does the company have to expense "investments" that would ordinarily be capitalized by a traditional retailer? 


ajc

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Re: SFIX - Stitch Fix
« Reply #18 on: January 01, 2019, 03:40:45 PM »


Given the very high churn rates suggested by multiples sources (company comments, credit card data referred to in VIC comments, the Goodwater Capital presentation you linked to early), it seems to me that the more relevant financial metrics for SF are the ones you'd use for a traditional retailer, rather than CAV/LTV and related measures that make more sense for enterprise software companies.  On the surface, SF's metrics (profits, operating margin, etc.) appear to be getting worse.  Why is that?  Does the company have to expense "investments" that would ordinarily be capitalized by a traditional retailer?



I can't find the quote (maybe it's apocryphal), but there's a Bill Gates line that says noteworthy shifts in computing happen every three years. Maybe e-commerce is the same.
Anyway, my estimation - since I can't be sure - is Stitch Fix was similarly hitting the limits of its existing model in 2017 and 2018 based on what I can figure.
Too many experiences like the one you had, market entry by Amazon Prime Wardrobe, etc, meant they had to take a serious look and evaluate what parts of their business model had got them to public company status. They had to decide what still worked and which parts were not worth continuing with if they wanted to stay competitive and maintain the quality of their business and financials.

I think the end of the line for this older, more simplistic model of theirs was what caused the dip. Their new model was then a start-up within a start-up and that's the new, differentiated Stitch Fix that's emerging. I expect this to happen every few years. Basically, I'd say the old model got to its limits based on what they were willing to spend to acquire customers and they found at a certain point the new customers didn't want to spend as much, were fussier, etc.
I think they had moved past their hardcore base and so they 'scaled' and pretty much went downmarket (ie. broader and lower). At that stage, they might've seen the declines you're talking about, noticed they weren't differentiated enough (Trunk Club, seeing the Amazon offering coming, etc), and taken a step back to do a rethink of what they'd need to do for the next few years in order to stay ahead of the curve.

To me, this is also what you have to do if you want to be a top growth company so I expect to see these fluctuations (ie. buying opportunities of the Phil Fisher variety) and frankly I'm optimistic about them because I like seeing Lake and company do this type of thing. If they just played out their hand and never changed up significantly while the competition did, there's no way I could invest.
 
Essentially, if you go back roughly a year you see Stitch Fix starts to leave behind the less differentiated business model and announce their Hybrid Designs as well as their personalized, exclusive lines with more high-end brands that was written about in that article.
Also, Intimates was released about a year ago and Kids a little after that in order to get moms hooked by bringing their children into the mix (after all, if the kids like it and get used to it then it's likely harder for mom to one day unsubscribe).
On top of that, Stitch Fix brought on Deirdre Findlay from Google as Chief Marketing Officer and Donna Boyer from Airbnb as VP of Product in the last year. Presumably to make sure their push into a number of new, differentiated brand and design directions gets executed on.

I'd say Stitch Fix has really been strategically reinventing and repositioning itself over the last year and a bit (after realizing they were moving relatively inadvertently towards worse places on the value chain instead of better ones), and once that newly created core starts to take hold and permeate through the existing (ie. old) Stitch Fix business, the value of it will start to show and the financials will reflect that.
It's a little like the Bezos line about how when an analyst says 'good quarter' he's sort of surprised because really this good quarter is a reflection of the work they focused on 3 or 4 years ago.
That's my best way of thinking about it right now.

(Alternatively, that's all one big and extravagant (if somewhat impressive, though I say so myself) rationalization. Caveat emptor as per usual with all this stuff. Appreciate the thought-provoking discussion. Happy 2019.)



SHDL

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Re: SFIX - Stitch Fix
« Reply #19 on: January 02, 2019, 01:04:03 PM »
Thanks much for the idea.  Still researching, but so far I have a good feeling about this one.  At least I think I can see the upside potential.

To add a bit to the ongoing discussion regarding their pricing, one thing to note is that the $20 “styling fee” is actually applied as a credit toward any purchased merchandise.  So for example if you buy a $40 sweater from them you pay $40, not $60.  (The VIC writeup for instance was a bit misleading in this regard.)  Put differently, they are essentially charging their customers for their styling services by baking the service fee into the price of merchandise — which I think explains (and justifies, at least for their core customers) their higher-than-normal markups. 

And to expand on this point a bit further, I think this company is probably best viewed as a combo of two businesses: (a) a clothing retailer, and (b) a personal styling/shopping service provider.  The really interesting and valuable part is of course (b), and I wouldn’t be surprised if the company’s business model changed pretty dramatically over time as they find better and more creative ways to monetize it.

Anyway, I think it’s an interesting company.  I may or may not buy their stock, but I will keep watching their moves regardless.