Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: ajc on December 29, 2018, 04:03:20 PM

Title: SFIX - Stitch Fix
Post by: ajc on December 29, 2018, 04:03:20 PM

Overview

Stitch Fix is an online styling service that delivers a box of personalized clothing (on a subscription basis, or a la carte). You fill out a profile on sign-up and are assigned a stylist. Based off of Stitch Fix's selection algorithms, your stylist handpicks pieces around your tastes, fit, and budget. They're mailed to you, and you keep what you like and send back what you don't. You give feedback for each item, kept or returned, on how you liked/disliked the fit, style, etc. Over time, Stitch Fix's AI and your stylist learn your preferences on every metric and deliver an ever more personalized selection.

The business is on track to grow FCF by over 100% YoY in 2019 and is selling for 14 times estimated 2019 free cash flow. The shares are down 70% from recent highs, because analysts have a superficial understanding of the company and compare it to Blue Apron. Stitch Fix shares also dropped a lot recently based on slightly below expectation user growth and the general NASDAQ decline.

The right way to think about Stitch Fix is as a new, deeply personalized, quality-first model for apparel retail. It's more like a combination of Google Search and Starbucks for clothing instead of some undifferentiated subscription box company. Spotify, Pinterest, and others try find the exact song, coffee table, etc, that fits you. Stitch Fix is changing apparel retail by doing the same for what you wear.

Their latest investor presentation - https://investors.stitchfix.com/static-files/be146355-1123-41f8-8128-b690d51d7b73


User and financial prospects, plus expansion opportunities

Stitch Fix is growing users and revenue by 20%+ annually and increasing ARPU at a good clip too. TTM revenue was $1.3B versus their current $1.7B market cap. Some of their stated long-term targets are: gross profit margin of 45%, operating profit as a percentage of revenue of 11%, adjusted EBITDA as a percentage of revenue of 12% (see investor presentation above). Stitch Fix recently expanded into the UK (their second country after the US), so this increased addressable client market should start to show up in 2019.

Once Stitch Fix has completed their UK launch execution, the company should be able to take a playbook approach towards similar territories. Places like Canada, Australia, Hong Kong, and Singapore, seem like sensible choices. Western Europe or Japan probably require more nuance, but are also options.

Stitch Fix, founded in 2011, has only now started to go beyond their female offering. Men was launched in late 2016, Plus Size in early 2017, and Kids in mid-2018. Those areas still have untapped growth potential (Kids especially since they grow out of clothes fast). Further, because Stitch Fix is the most personalized mainstream offering there's a chance for them to one day expand into big ticket, high margin items like wedding dresses, jewelry, etc.


If Stitch Fix isn't another Blue Apron, what is it?

Two comparisons....

First, Google Search understands your preferences and can predict them while you're typing. Until now, clothing has been mass manufactured to standard fits and patterns by manufacturers, then put on store racks. It's not personalized and the store has no memory of you. Stitch Fix builds up a profile of your exact preferences, so like Google Search the more you use it the better it gets.

While Amazon often suggests bizarre additions to your basket based on their algorithm, Stitch Fix actually knows what it's doing. Amazon Prime Wardrobe is seen as Stitch Fix's biggest competition, but Amazon has a long way to go even with their regular recommendation AI. Like Google Search, Stitch Fix has a virtuous circle at work. More clients means more feedback, more feedback data allows it to get more accurate at predicting preferences. A reputation for accurate prediction drives brand awareness and attracts new clients, and so on and so forth.

Starbucks is another worthy comparison. They originally persuaded consumers to pay a premium for overall experience, a good quality cup of coffee, and some snob appeal. Their brand positioning allowed them to not have to compete too heavily on price. Starbucks is standard today, but there was a time at the beginning when most considered it crazy to shell out $5 for their coffee. Howard Schultz figured that society's spending power would catch up and the Starbucks experience would eventually be appreciated and democratized. Lake has been smart about positioning the Stitch Fix brand in roughly the same way, so Stitch Fix has a long-term opportunity to maintain a premium valuation over its peers.

Stitch Fix is also uniquely innovative in that every client now has their own personal tailor. Users will often tell their stylists about the child they're expecting, wedding dates, etc, so the stylist knows exactly what to provide and the relationship can become deeper and more long-term as a result. This is reciprocal in that stylists send notes to clients with each fix too. There was a time when only the rich could afford their own private tailor, but Stitch Fix is scaling that. It's a luxurious idea, but like Netflix, Spotify, etc, consumers in future will expect fully personalized clothing offerings on size, fit, style, etc, and Stitch Fix is currently best-in-class at this.


Financial performance, economics of the business, and competitive advantages

Stitch Fix has been profitable almost since the start. It has no debt. It's unclear how long they'll keep up their current strong FCF growth, but it's inexpensive based on where FCF will be for 2019 together with their revenue and user growth opportunities.

They don't have the real estate expense often associated with retail. That also means no costly need to update and remodel your stores regularly. Stitch Fix does have to keep setting the standard with their core business proposition, but their model and brand positioning means they get to avoid much of the crappy economics retail is known for.

As mentioned previously, their overall dataset and ability to analyze it gives them the opportunity to become almost a Google Search (with mapping capability) for clothing. As long as they continue to lead there, they can build a competitive advantage around that. It'll enable them to attract more clients and they'll also be able to attract the best clothing brands since those brands will want to be in front of the most discerning consumers.

Stitch Fix manages inventory better than others since their data gives them a far clearer idea of what people will buy. That means there's less waste and capital tied up in inventory. While Amazon is a low-cost, quick shipper, Stitch Fix is not a discounter and has a brand known for personalization and client service. This also allows Stitch Fix to offer itself to brands as a platform that maintains some sense of exclusivity and pricing power.

Stitch Fix could therefore continue positioning itself as a higher-end, truly personalized platform and reap the benefits. For many consumers and brands, having a classier, higher quality alternative to Amazon would be both competitively useful and financially valuable. Stitch Fix would end up with the various economic and competitive advantages that platform status would bring.


Management, culture, and data science

Katrina Lake is a highly intelligent, driven, and grounded CEO with 10%+ ownership. You can get an idea of her business instincts and mind at work by listening to these discussions - https://www.youtube.com/watch?v=Lk2_Q507g8I & https://soundcloud.com/adam-berke/target-audience-podcast-episode-4-katrina-lake. She recruited Eric Colson from Netflix in 2012 to head up algorithms and data science, as well as folks like Mike Smith, Cathy Polinsky and Paul Yee to the management team. VC's like Steve Anderson and Bill Gurley were also both persuaded to invest even though she was an unproven quantity at the time with no experience running a retail business.

Culturally, Stitch Fix is known for having an open, friendly work environment with an emphasis on hiring people who know their business inside out and can execute plus advance the company into new areas. They employ mostly women and are obviously female led. This might give Stitch Fix a slight advantage in recruiting top female talent, since Silicon Valley can sometimes be a slightly challenging place for women to find safe, equal working conditions.

Data is vital across the organization and it's used not just for clothing algorithms, but also for warehouse and inventory efficiency, as well as product testing among other things. Stitch Fix also employs more data science PhD's than any other pure apparel retailer and is a favored destination for female STEM graduates. For those interested in going into the weeds, I highly recommend the Stitch Fix Engineering and Data Science blog (https://multithreaded.stitchfix.com/blog/) to see how data is used and what it's used on across the company. Basically, every aspect of the business is analyzed in order to create greater efficiency and better customer outcomes. This focus will likely pay off nicely over the long-term.


Risks and negatives

As an investor with an owner-oriented mindset, I wish their emphasis on FCF was more front and center in their financial reporting and letters. That said, I'm glad they cover it and am happy overall with what they focus on.

Amazon Prime Wardrobe is their main competitor even though it focuses on delivery speed and price instead of personalization. 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. Stitch Fix clearly can't rest though since Amazon is know for plugging away at weaknesses for years until they're solved.

Katrina Lake owns 10%+ of the shares which is highly encouraging, but as with many Silicon Valley companies she also has super voting shares. While this is almost standard these days for many new companies in tech or related industries, I'd prefer not to see it. It does prevent Stitch Fix being bought out (and screwed up) though, for a cheap price relative to the long-term value they'll likely create.

Glassdoor ratings for Stitch Fix have recently trended lower from 3.8/5 to 3.3/5. While retail is a tough industry so this is understandable, I think they need to put effort into addressing the root of this.

Stitch Fix has also chosen to operate in an industry where yesterday is past and clients only care about how good you are today. As soon as they stop continuously improving their core offerings, or pay less attention, or any number of things, they'll create space for others. While that doesn't mean Stitch Fix should throw away their intelligent approach of growing and expanding thoughtfully, it does mean complacency is clearly a non-starter.

Finally, founder/CEO Katrina Lake is integral to the company going forward and so there's key woman risk. If she were hit by a bus tomorrow or her performance dropped off noticeably over time, that would materially impact the ability of Stitch Fix to continue to lead their market. The same likely goes for Eric Colson and potentially Mike Smith from the management team. Cathy Polinksy, Paul Yee, and 1 or 2 others, would also take time to replace.


Recommended reads

https://hbr.org/2018/05/stitch-fixs-ceo-on-selling-personal-style-to-the-mass-market

https://www.forbes.com/sites/ryanmac/2016/06/01/fashionista-moneyball-stitch-fix-katrina-lake/

https://www.reforge.com/blog/stitchfix-personalization-retention-monetization

https://www.goodwatercap.com/thesis/understanding-stitch-fix

https://techcrunch.com/2017/10/22/unboxing-stitchfixs-s-1/


Title: Re: SFIX - Stitch Fix
Post by: clutch on December 29, 2018, 04:46:27 PM
"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.
Title: Re: SFIX - Stitch Fix
Post by: KJP on December 29, 2018, 05:57:54 PM
Have you tried the service?  I did and found the curation poor (sending me clothing types I said I did not want), overpriced and, in several instances, not unique, e.g., a sweater from Banana Republic.  I've asked a few others who tried the service and they had the same impression.  I tried them a couple of years ago, so perhaps they've improved.

Also, there are other competitors, such as Trunk Club, but I'm not sure how well any of them are doing. 
Title: Re: SFIX - Stitch Fix
Post by: johnny on December 29, 2018, 10:55:27 PM
I'm not sure I buy the data/moat argument here. I question how sophisticated such an operation can be, given how costly data point collection (Netflix can pull about 100 signals from you cruising around the carousel, at zero cost). The attached graphic in the presentation doesn't exactly impress me.

Data-y moats start to build when you begin to know things about the user that they don't know or aren't factoring in correctly. "Dana is 172.7 centimeters tall" is a fine enough thing to know, but it's not exactly the Colonel's Recipe, and I'm not sure how much proprietary signal they can credibly claim to have on Dana that prevents FitchStix from coming around and peeling off a chunk of their users with some novel gimmick.

Title: Re: SFIX - Stitch Fix
Post by: ajc on December 30, 2018, 01:23:32 PM

"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


Title: Re: SFIX - Stitch Fix
Post by: ajc on December 30, 2018, 01:33:56 PM

Have you tried the service?  I did and found the curation poor (sending me clothing types I said I did not want), overpriced and, in several instances, not unique, e.g., a sweater from Banana Republic.  I've asked a few others who tried the service and they had the same impression.  I tried them a couple of years ago, so perhaps they've improved.

Also, there are other competitors, such as Trunk Club, but I'm not sure how well any of them are doing.


Ha. I can't since I'm not from the US, but I know you're not the only one who that's happened to. Since 2013, my Stitch Fix research on the customer satisfaction and comparison side has been through blogs, YouTube videos, fashion sections of national newspapers, clothing magazines, etc. I've gone through a couple hundred of them to get a sense of the average consumer's attitude towards Stitch Fix with a focus on those articles where they'll compare a bunch of services that do the same thing. I also get a daily Stitch Fix alert from Google with the top five or ten news stories, blogposts, etc, about the company.

Over time I've been able to build up a pretty solid sense that Stitch Fix is the best bet in the space. Clearly the rebuttal could be I've not used it so that's a point against, but I tend to think I get to look at the numerous reviews and data instead of relying on my individual positive/negative experience. I guess there are pros and cons to both.

Like you say, there's Stitch Fix, Trunk Club (acquired by Nordstrom), Dia & Co (for plus size), Wantable, and others in the space. I've noticed Stitch Fix is usually the most favored by a clear margin and because of/related to that it's also been the best at scaling (see images attached below). Also, because Stitch Fix does women, men, and kids, I think it offers working mothers the chance to do all their shopping in one place. That's a practical advantage competitors might overlook.

To be more specific about onboarding and curation, I'd say your experience is a problem for the business model. That goes for the whole space though, not just Stitch Fix. There's an element of randomness and that is strongest in the beginning. In a perfect world, everyone would stay with the service for 6 months for their preferences to become far more obvious. Clearly there's not a chance in hell that's going to happen.

The approach as far as I can tell is for Stitch Fix to simply be better on average than the competition in the start and through the customer's lifetime. There will be unhappy clients who leave after mediocre experiences, but at this stage of the technology and business model I think it's more of a numbers game where you try beat the odds and maintain a strong net promoter score. From an investment point of view, it sucks to hear that happened to you and from the same point of view it's also completely understandable given there's randomness in the model and that means bad initial experiences for a certain amount of people.

Interestingly, this is a common thing for a lot of tech that I can think of. These days and in the past. There was a time when Amazon had Xmas screw-ups with late deliveries though they were always much better than the competition on average. Nowadays, Uber and Lyft started out with some really terrible reviews and so riders would switch services. Same with UberEats, Doordash, GrubHub, and Postmates for food delivery. Some of the reviews really lay into them and swear you should use X instead of Y. Scroll down a little and someone else is saying the exact opposite with just as much dissatisfaction.

I think it's somewhat in the nature of a lot of these businesses that there's a given amount of unhappiness in the start. For Stitch Fix, I'd say it's more likely because of the styling fee and the sense a client might end up empty-handed. There's two ways to look at that perhaps. One is it's better to stick to businesses where that stuff's been ironed out and the experience is good from the start almost always (say Uber these days, just for example). Another way to look at it is that Stitch Fix must be pretty good if they can succeed in a business where the first few months are actually that hard to make a customer conversion in. I tend towards the first, but I admire what Stitch Fix has achieved given the clear challenges.

Title: Re: SFIX - Stitch Fix
Post by: ajc on December 30, 2018, 01:36:26 PM

I'm not sure I buy the data/moat argument here. I question how sophisticated such an operation can be, given how costly data point collection (Netflix can pull about 100 signals from you cruising around the carousel, at zero cost). The attached graphic in the presentation doesn't exactly impress me.

Data-y moats start to build when you begin to know things about the user that they don't know or aren't factoring in correctly. "Dana is 172.7 centimeters tall" is a fine enough thing to know, but it's not exactly the Colonel's Recipe, and I'm not sure how much proprietary signal they can credibly claim to have on Dana that prevents FitchStix from coming around and peeling off a chunk of their users with some novel gimmick.


So, Eric Colson (Chief Algorithm Officer, Stitch Fix) worked at Netflix for 6 years and was their VP of Data Science and Engineering. According to him, Netflix doesn't come close to Stitch Fix in terms of data science & AI.

See 6min00secs for that quote, but anyone who wants to understand Stitch Fix should likely watch the whole thing - https://www.youtube.com/watch?v=z_OGYzT_MBo


Title: Re: SFIX - Stitch Fix
Post by: KJP on December 30, 2018, 02:46:54 PM

Like you say, there's Stitch Fix, Trunk Club (acquired by Nordstrom), Dia & Co (for plus size), Wantable, and others in the space. I've noticed Stitch Fix is usually the most favored by a clear margin and because of/related to that it's also been the best at scaling (see images attached below). Also, because Stitch Fix does women, men, and kids, I think it offers working mothers the chance to do all their shopping in one place. That's a practical advantage competitors might overlook.

I also have personal experience with Trunk Club ("TC") and thought it was worse than Stitch Fix ("SF").  TC had the same curation issues and was even more overpriced than SF, in part because they're shipping Nordstrom's private labels, which I believe are more expensive than SF's.

I agree with you that curation should improve over time, which should also help margins by lowering returns.  But I was concerned about pricing.  SF's current and long-term target gross margins are around 45%.  If I recall correctly, Nordstrom, Macy's, GAP and Urban Outfitters, on the other hand, have gross margins in the mid- to high-30's.  What drives the difference? 

Part of it could be accounting in that the brick-and-mortar retailers may include store operating costs in COGS (I haven't checked).  But my sense from the personal experience with SF was that they were charging full price, while other retailers have to discount.  I know SF has introduced some of their own labels, and it's easier to get away with higher GMs if  people cannot price compare.  But if you're selling third-party items that customers can find cheaper elsewhere online, how sustainable is that?  Or perhaps the question is how big a market is there for that kind of service?
Title: Re: SFIX - Stitch Fix
Post by: bizaro86 on December 30, 2018, 04:52:21 PM
I could see them getting relatively significant discounts from fashion labels at a certain scale as a way to "push" product. It also seems likely they would be uniquely placed to buy fashion close outs and sell them at full price.

So the improved margins could be in the cost side of the ledger as well as the pricing side.

Thanks for the idea, I had heard of them previously but just assumed they were venture/private.
Title: Re: SFIX - Stitch Fix
Post by: KJP on December 30, 2018, 05:38:59 PM
I could see them getting relatively significant discounts from fashion labels at a certain scale as a way to "push" product. It also seems likely they would be uniquely placed to buy fashion close outs and sell them at full price.

So the improved margins could be in the cost side of the ledger as well as the pricing side.


If it's a scale benefit, then GM should increase as revenue increases.  That's not the case.  They've had steady GM (44%) over the last three years despite a near doubling of revenue.  See slide 16 here:  https://investors.stitchfix.com/static-files/be146355-1123-41f8-8128-b690d51d7b73 
Also, the long-term management target model projects 45-46% GM, so no big scale benefit on the GM line even at maturity.  [See slide 19]  Instead, future profit margins will be driven by (according to management) SG&A leverage.  Thus, management sees scale benefits showing up further down the income statement, rather than via GM.

Your other hypothesis -- that fashion labels use them as a way to get rid of excess inventory -- is possible.  But if that's true, it would only increase my concerns about being able to sell at full price, because there's a greater risk that the same product is available much cheaper through another channel.
Title: Re: SFIX - Stitch Fix
Post by: KJP 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?
 
********

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.
Title: Re: SFIX - Stitch Fix
Post by: ajc 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.


Title: Re: SFIX - Stitch Fix
Post by: clutch 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.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen 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. 
Title: Re: SFIX - Stitch Fix
Post by: KJP 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.
 
Title: Re: SFIX - Stitch Fix
Post by: dwy000 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.
Title: Re: SFIX - Stitch Fix
Post by: ajc 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.


Title: Re: SFIX - Stitch Fix
Post by: KJP 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? 

Title: Re: SFIX - Stitch Fix
Post by: ajc 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.)


Title: Re: SFIX - Stitch Fix
Post by: SHDL 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.
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 03, 2019, 10:29:33 AM
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 imagine their tech “investments” are a big driver here.

In terms of numbers, their filings indicate that their tech team grew from about 170 employees in 2017 (95 engineers and 75 data scientists, according to their S-1) to more than 280 employees in 2018 (180 engineers and 100 data scientists, according to their 10-K).  Each employee probably earned a base salary in the $100k-300k range and cost the company around $200k-900k.  So the incremental cost of growing the team by 110 was likely around $22-99m.  If so, that explains a big chunk of their $90m y-o-y increase in SG&A expenses. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 17, 2019, 11:42:55 AM
So as part of my research, I tried placing an order with them.  Here’s how it went in case anyone’s interested:

I first had my wife create an account with them.  They made her answer a very long list of questions about her physical appearance (height, weight, other measurements, age, …) and preferences (which body parts she wants to (de-)emphasize, personal colors, favorite brands, preferred price range, …). 

Then I had her place an order, with a note attached telling them pretty much exactly what type of item she wanted (blouse, sweater, …) and for what occasion (work, casual, …), along with a few other special notes/requests (how conservative the office environment is, fabric quality, …).

It took over 2 weeks for the items to arrive.

The items that arrived were all of good quality and fit perfectly, and all special requests were honored.  Out of the 5 items that arrived, 2 were excellent picks (much better than what was expected), 1 was shall we say “adventurous” (a bold design that she had never tried before), and 2 didn’t work in terms of color/style and were sent back.  They asked for detailed feedback on each item as part of the check out process.

In total, she spent about $220 total on 3 items. 

I tried to do a price comparison online but that wasn’t really possible because the exact same products were nowhere to be found (including those from very well-known brands, interestingly).  But my very rough guess is that she probably could have bought comparable items for about $150 elsewhere. 

So was this a good deal?  For one thing it was certainly a nice time saver — it probably would have taken her at least a few hours searching around and trying things on to get the items she got from another seller.  Our personal circumstances are such that spending $70 or so to save those several hours is worthwhile, but of course not everyone will feel the same way.  Also, return shipping is really easy for us because we live in a building where we can just leave the package with the front desk concierge, but I think it’s a much bigger hassle for many other people. 

And most importantly:  My wife was pretty happy about the experience and wants to place another order. 
Title: Re: SFIX - Stitch Fix
Post by: KJP on January 18, 2019, 08:02:24 AM
So as part of my research, I tried placing an order with them.  Here’s how it went in case anyone’s interested:

I first had my wife create an account with them.  They made her answer a very long list of questions about her physical appearance (height, weight, other measurements, age, …) and preferences (which body parts she wants to (de-)emphasize, personal colors, favorite brands, preferred price range, …). 

Then I had her place an order, with a note attached telling them pretty much exactly what type of item she wanted (blouse, sweater, …) and for what occasion (work, casual, …), along with a few other special notes/requests (how conservative the office environment is, fabric quality, …).

It took over 2 weeks for the items to arrive.

The items that arrived were all of good quality and fit perfectly, and all special requests were honored.  Out of the 5 items that arrived, 2 were excellent picks (much better than what was expected), 1 was shall we say “adventurous” (a bold design that she had never tried before), and 2 didn’t work in terms of color/style and were sent back.  They asked for detailed feedback on each item as part of the check out process.

In total, she spent about $220 total on 3 items. 

I tried to do a price comparison online but that wasn’t really possible because the exact same products were nowhere to be found (including those from very well-known brands, interestingly).  But my very rough guess is that she probably could have bought comparable items for about $150 elsewhere. 

So was this a good deal?  For one thing it was certainly a nice time saver — it probably would have taken her at least a few hours searching around and trying things on to get the items she got from another seller.  Our personal circumstances are such that spending $70 or so to save those several hours is worthwhile, but of course not everyone will feel the same way.  Also, return shipping is really easy for us because we live in a building where we can just leave the package with the front desk concierge, but I think it’s a much bigger hassle for many other people. 

And most importantly:  My wife was pretty happy about the experience and wants to place another order.

Thanks for the info.  Did the Fix include brands that your wife wasn't previously aware of?

My fixes did introduce me to a new brand, which was great for me.  But now that I know my fit in that brand, I buy directly from the brand's DTC website.
Title: Re: SFIX - Stitch Fix
Post by: ajc on January 18, 2019, 08:19:58 AM


I tried to do a price comparison online but that wasn’t really possible because the exact same products were nowhere to be found (including those from very well-known brands, interestingly).  But my very rough guess is that she probably could have bought comparable items for about $150 elsewhere. 



Part of this article addresses that - https://www.businessoffashion.com/articles/news-analysis/stitch-fix-introduces-over-100-contemporary-brands.

Stitch Fix is using client feedback and their data science teams to create unique offerings that only they sell. I think KJP pointed out that a few places do this, but I don't know of anyone who is actually doing it in such a tailored and scientific way. In other words, you really can't buy many of their items anywhere else and in fact they're produced specifically to appeal to client's taste preferences in ways that their competition doesn't actually have the data on or fully understand. Therefore, I'd say what your wife bought was really a more well-designed product in the sense that comparable ones for $150 would've been somewhat less appealing. At this stage it's more like the difference between a meal with ever so slightly too much spice or something like that. The thing to keep in mind is that the product differences are almost unnoticeable at this point, but a few years from now they'll become more apparent as Stitch Fix continues to deepen their understanding. If you take their Hybrid Designs as a simple example of this, Eric Colson has already noted in various talks that they were very good sellers and in this article you can see that the sales performance of some of them was extraordinary - https://qz.com/1028624/stitch-fix-let-an-algorithm-design-a-new-blouse-and-they-flew-off-the-digital-racks/. So, the differences right now in the Stitch Fix experience and clothing are mostly imperceptible, but I think it's unlikely to be that way for many more years.

This other article (https://www.forbes.com/sites/pamdanziger/2018/12/01/nikes-new-consumer-experience-distribution-strategy-hits-the-ground-running/) on Nike's new consumer experience strategy (which Stitch Fix made the cut for), also gives some further and different insights about where the fashion industry and brands are headed. If you combine this with the Business of Fashion article above, you can see that Stitch Fix clearly stands to benefit significantly from this trend given that their service is more personalized than everyone else in most respects.

Finally, Stitch Fix also took market share (https://seekingalpha.com/news/3423111-online-holiday-sales-17-percent-2018) this holiday season even though usually they do not see a bump in these months. Basically, they're a full price, year-round, personalized service, so Black Friday, Xmas, etc, isn't something they participate in, nor do they do marketing for any of this stuff.

Related to your experience with Stitch Fix, there's one thing I've noticed which is actually a little incredible. Twitter is obviously known for no-holds-barred commentary. If someone thinks something is a piece of shit, then Twitter (and YouTube comments) is likely going to be the place you'll find them saying that.
On the other hand, looking over the Stitch Fix feedback on Twitter these past few months it is pretty much uniformly positive and enthusiastic (https://twitter.com/search?q=stitch%20fix&src=typd). Scroll down as far as possible. I mean, for anyone who knows how rough-and-tumble that place can be, it really is somewhat crazy.
Also, having performed that search regularly over the past few years, it's clear to me Stitch Fix has actually improved their service, since there was a time a while back when there was at least a visible amount of dissatisfaction with them coming from a chunk of clients. That's not to say everyone's happy today or anything, but I think their performance on this score is worth a mention for its outlier status.


Title: Re: SFIX - Stitch Fix
Post by: cameronfen on January 18, 2019, 10:15:19 AM
I think SFIX is growing on me.  Personally I think retail whether its online or offline makes no money.  Amazon never turns a large profit on it's own items and the place most of these people make money is by charging a fee to independent sellers.  The average retailer has a price to sales ratio of .5 and online retailers have no significant cost advantage as the lack of stores advantage is negated by their much higher shipping costs.  To piggy back on other people, the advantage SFIX has and where the most value imo is in their own brands that they will create by learning about the behavior of shoppers (and so the retail side is important in expanding their data moat).  These companies trade at a price to sales of roughly 2x with the high end brands (berburry, lvmh etc.) generating formidable roe.  But even something like a gilidian or a fruit of the loom or a Zara are high roe profitable companies that have withstood the test of time. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 18, 2019, 10:15:46 AM
Thanks for the info.  Did the Fix include brands that your wife wasn't previously aware of?

My fixes did introduce me to a new brand, which was great for me.  But now that I know my fit in that brand, I buy directly from the brand's DTC website.

I’d say yes, in fact she wasn’t aware of any of the brands except Calvin Klein. 

The interesting thing is (as I briefly touched upon in the post above) none of the items they sent us were available for direct purchase from the brands’ websites.  For example one of the items she really loved was a pair of office appropriate dress pants from Kut From The Kloth.  But then when I visit their website all they have are casual items like denims and cords. 

So I totally buy ajc’s hypothesis above (very informative post as always BTW) that the items they sent us were actually Stitch Fix exclusives despite their (non-private) branding.  And if so, they are making the right move IMO because by doing so they are creating a way to avoid direct price competitions with the brands’ DTC websites.
Title: Re: SFIX - Stitch Fix
Post by: KJP on January 18, 2019, 10:45:19 AM
Thanks for the info.  Did the Fix include brands that your wife wasn't previously aware of?

My fixes did introduce me to a new brand, which was great for me.  But now that I know my fit in that brand, I buy directly from the brand's DTC website.

I’d say yes, in fact she wasn’t aware of any of the brands except Calvin Klein. 

The interesting thing is (as I briefly touched upon in the post above) none of the items they sent us were available for direct purchase from the brands’ websites.  For example one of the items she really loved was a pair of office appropriate dress pants from Kut From The Kloth.  But then when I visit their website all they have are casual items like denims and cords. 

So I totally buy ajc’s hypothesis above (very informative post as always BTW) that the items they sent us were actually Stitch Fix exclusives despite their (non-private) branding.  And if so, they are making the right move IMO because by doing so they are creating a way to avoid direct price competitions with the brands’ DTC websites.

Interesting.  The item may be a Stitch Fix exclusive for now, but if it's successful how long will that last?  In other words, if a product is really a hit on Stitch Fix, why won't the brand eventually add it to their regular lineup that's available at other retailers or DTC? 

Switching gears, you can see why brands really like Stitch Fix.  Kut From The Kloth just got a new (full price!) customer.  What was its acquisition cost for that customer?
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 18, 2019, 11:19:35 AM
Interesting.  The item may be a Stitch Fix exclusive for now, but if it's successful how long will that last?  In other words, if a product is really a hit on Stitch Fix, why won't the brand eventually add it to their regular lineup that's available at other retailers or DTC? 

That’s a valid concern for sure.  If Stitch Fix is playing their cards right, they probably either (a) have contracts in place that prevent the brands from selling competing products elsewhere, and/or (b) are scattering their orders across multiple brands so that no one else really knows how big of a hit each design is.  More generally I think Stitch Fix has good leverage in its relationship with the brands, and the key question really is how well are they using it. 

Longer term, I think they will make their private brands a much bigger piece of the pie.  And when that happens this will likely be less of a concern.
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 18, 2019, 01:58:35 PM
Also one more thing:  If, for example, Stitch Fix knows that a certain style is very well received by a small but profitable group of customers, they can order just enough items to fill that niche and send them out in a targeted fashion.  The brands involved on the other hand are in no position to make such decisions/moves given their lack of data, and that is unlikely to change any time soon.
Title: Re: SFIX - Stitch Fix
Post by: Spekulatius on January 18, 2019, 03:36:32 PM
Very good exchange above. I don’t own this and it doesn’t really fit what I am looking for, but I agree this is an interesting business to look at. I suspect the most important comment may be this one:

Quote
And most importantly:  My wife was pretty happy about the experience and wants to place another order.
Title: Re: SFIX - Stitch Fix
Post by: ajc on January 19, 2019, 05:40:53 AM


Also one more thing:  If, for example, Stitch Fix knows that a certain style is very well received by a small but profitable group of customers, they can order just enough items to fill that niche and send them out in a targeted fashion.  The brands involved on the other hand are in no position to make such decisions/moves given their lack of data, and that is unlikely to change any time soon.



That's right. Your previous points too. Investors might wanna keep a few other things in mind as well:

- Of the retailers that were founded in the millennial era, Stitch Fix is the most popular (see image below). Why mess up your relationship with a retailer that could be one of the biggest US channels in a decade?

- Stitch Fix sells 1000's of brands. Market share for brands differs between mass market (eg. Nike, the biggest player, has less than 3% global apparel market share) and luxury (I've seen numbers where certain companies own 15%+ of the market). Given Stitch Fix's positioning and total number of brands, I'd say it's unlikely that any one brand counts for much more than 5% of their sales. In other words, unless you're some truly indispensable brand (if that exists), all that'll happen if you go off the reservation is that Stitch Fix will go to a few other comparable brands that use them as a channel and offer their product insights to those businesses. In the following year, Stitch Fix will still be able to sell that same unique, new product they know clients will love, except it'll have Ralph Lauren on instead of that other top brand that decided to overplay their hand.

- Connected to that, of the apparel retailers that have significant market share among millennials, Stitch Fix is the only one that doesn't discount. What brands get from this is higher margins and increased cache given that discounting is a sign of brand weakness. Essentially, Stitch Fix is the best general millennial apparel retailer for helping both brand margins and image. Probably not something you want to screw with.

- Also, because Stitch Fix refuses to discount, it's the perfect place (or at least one of the few) where brands can expand into even more luxurious and expensive offerings than they usually do. Especially since the personalization aspect Stitch Fix provides gives brands a good reason to actually charge that little bit more. Why destroy your relationship with one of the few, major channels which might allow you to more easily move higher up the brand value stack over the next decade?

- Finally, fashion changes annually. You might think you're smart for taking advantage of Stitch Fix this year, but next year when you've been cut out and they shared their data and insights with everyone else, you won't know exactly what to design but every other brand on Stitch Fix will. As the great philosopher DJ Khaled once said, 'congratulations... you played yourself'.

There are a few things more, but mostly it comes down to the fact that Stitch Fix is already 3 years (if not 5, which I think is more probable) ahead of everyone else in terms of understanding personal preferences, fit, design, and so on. Same goes for their ability to see emerging trends in the data and the industry on all those aspects. To take the example of where KJP went to shop, those people have no idea why he liked what he bought. Was it mostly the design? The fit? Something else? They're basically flying blind using the old retail and design model and that's true in how they relate to all their customers. Stitch Fix on the other hand knows exactly that you bought it because you loved the fit though you though they could've done this and that with the design. That info then gets passed on to the company for next years range. Imagine giving up that crystal ball even though all your 1000+ competitors have decided to retain it?

One last-ish point. Stitch Fix is significantly ahead in all this right now. A little like how SkyBox Imaging (which Google bought) allowed them to see traffic flow patterns, new construction, etc, globally. Wall Street firms were successfully using that tech to count cars in Walmart parking lots and predict quarterly SSS, bets were being made on grain harvests from aerial imaging, and new construction activity gave real time insights into the Chinese economy. Now compare that to some street camera or person on the road side counting cars in order to optimize traffic in a single city. That's kind of where the traditional industry is now versus Stitch Fix's SkyBox type business. Maybe I've dramatized it a little for effect, but it's not a million miles off.

The question to ask is what does the average customer expect ten years from now and where does the value lie in the fashion industry? My thinking is that a decade from now, the wealthy (and even just the well-off) are going to expect personalized clothing. The idea that you need to try on 50 items to keep one is an anachronism. In an age of technology, data, and personalization, it's frankly fucking ridiculous that a clothing manufacturer can't make something specifically for me and my tastes. That might sound a little crazy if you're just buying cheap stuff, but if you're spending a few hundred bucks an item then you won't feel the same. And that's where it starts in fashion, at the top. So first, it'll likely become standard with expensive fashion goods that are fully personalized (see the 3D printed Adidas sneakers shaped to your feet - https://www.arch2o.com/adidas-3d-printed-shoes-customised-for-each-individuals-feet/), and after a while as the tech becomes cheaper it'll likely be done as standard across the industry.

Before you get to that point though, I think it needs to be asked what the interim looks like for the industry and I think it looks a lot like Stitch Fix. They're the ones with all the data across every item and style type, they see the industry from a birds-eye view, they offer brands full-pricing and far more personalized design ability. I think Stitch Fix also offers the vast majority of brands something they won't have for a long, long time. There are big brands with the resources to build their own version of Stitch Fix and cut them out (though whether most of them actually have the ability to integrate that kind of a data-centred, tech-heavy approach is questionable), but I think for the majority of smaller brands that don't have $100's of millions to spend on building out their own platform, Stitch Fix really is their best option for advancing into this new, personalized age of apparel and because there are so many of them and Stitch Fix is far and away the leader in this area, it is Stitch Fix that has most of the leverage as the industry evolves and not the average fashion brand which could potentially be discarded since there's another 1000+ waiting.

Of course, that'll all change one day as the next generation comes up with their own set of innovations and at that stage Stitch Fix will have to watch their backs, but for now I think it's reasonably safe to say that Stitch Fix is in fact the one doing all the innovation and envelope pushing and for almost all brands in that space it's a hard argument to make that they should sit on the sidelines and miss all of the brand, margin, and design progress, that Stitch Fix almost uniquely offers out of the bigger, general apparel retailers. Bottom line... for 999 out of 1000 brands, fucking with Stitch Fix will hurt the brand's optionality more than it'll hurt Stitch Fix's.


Title: Re: SFIX - Stitch Fix
Post by: cameronfen on January 19, 2019, 08:19:37 AM
Does Stitch Fix allow people to search for an article of clothing and buy it?  Or do you just have to order a fix and hope for the best? I feel like not having that option or not emphasizing it is leaving money on the table.
Title: Re: SFIX - Stitch Fix
Post by: SHDL on January 19, 2019, 08:38:18 AM
Does Stitch Fix allow people to search for an article of clothing and buy it? 

They don't, but I think they will at some point - as you say, they're likely leaving money on the table by not doing so.

That being said, they already do allow you to enter virtually arbitrary requests like "please get me a black skirt for work" or "I want a pastel colored dress for an upcoming cocktail party - and btw I'm 4 months pregnant" when you order a Fix, so in that sense a search functionality is sort of there.  In fact, as long as it works well (i.e., people actually get what they want), that might actually be a better form of search vs something like Google or Amazon.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on January 19, 2019, 09:35:11 AM
Does Stitch Fix allow people to search for an article of clothing and buy it? 

They don't, but I think they will at some point - as you say, they're likely leaving money on the table by not doing so.

That being said, they already do allow you to enter virtually arbitrary requests like "please get me a black skirt for work" or "I want a pastel colored dress for an upcoming cocktail party - and btw I'm 4 months pregnant" when you order a Fix, so in that sense a search functionality is sort of there.  In fact, as long as it works well (i.e., people actually get what they want), that might actually be a better form of search vs something like the Google or Amazon.

The one argument against offering an online mall is it may cannibalize buying regular fixes.  From the perspective of a company selling fixes is great because even if my algorithm tells me you like A more than B and I have extra inventory of B, I can send you B without you knowing you could have gotten A.  But again I feel like that is a small price to pay for additional revenue. 
Title: Re: SFIX - Stitch Fix
Post by: ajc on January 19, 2019, 11:02:04 AM


Does Stitch Fix allow people to search for an article of clothing and buy it?  Or do you just have to order a fix and hope for the best? I feel like not having that option or not emphasizing it is leaving money on the table.



Very good question. I tried thinking it through a short while back.

See minute 5 in this discussion (https://www.youtube.com/watch?v=OhCrN9N-ob8) for the philosophical answer. It's a good interview (Lake is very intelligent and upfront about her limitations). Worth listening to for the various Stitch Fix-related insights too (see 30mins in and the Q&A at the end).

More practically, I think it's an inventory issue. Stitch Fix differs from most retailers in that its data and accuracy allows it to be much tighter at managing inventory than everyone else. Also unlike most, it owns its inventory. Allowing consumers to choose would ultimately hand inventory decisions and control over to the clients, instead of keeping them in the hands of Stitch Fix.

Another way to look at this issue conceptually though, is whether ten/twenty years from now most people will be looking for songs on Spotify or videos on YouTube via search, or whether the AI will be so good that it predicts your preferences so near-perfectly that you just essentially go with the flow instead of always locating your own favorites?

Not to say a regular search function makes no sense in the future, but I can also sort of imagine a time where AI knows your tastes so well it just keeps on recommending great, unexpected stuff. Remember, we're in the first inning of personalization so there's still lots of improvement needed for the system to work exactly right. However, for those who play video games where you toggle through character clothing/uniform styles, you can kind of see a future where Stitch Fix just sends awesome, well-fitting outfits, and you throw them on before taking on the world.

It sounds a little crazy, but the future often does. I remember 20 years ago when we had the crappiest dial-up modems and basic computers that used MS-DOS. It's so archaic looking back. Today, some of the stuff you can do with your phone is just light years ahead of where we were two decades ago, and oh yeah... it can fit in your pocket. The changes that happen over ten and twenty year time frames really can be somewhat incredible.

(Also if you want to go on a slight binge, I think the following two interviews are some of her best for getting a deeper idea about the company:
- https://www.youtube.com/watch?v=Lk2_Q507g8I and,
- https://soundcloud.com/adam-berke/target-audience-podcast-episode-4-katrina-lake)


Title: Re: SFIX - Stitch Fix
Post by: cameronfen on January 19, 2019, 02:43:24 PM
Thinking about the question about why no regular retail portal some more, if you have a portal, this encourages price shopping on multiple sites.  When you get a fix, the endowment effect kicks in even if you do look at other products that you could have bought from other portals.  Additionally not having a portal also has an advantage so competitors dont know what you offer (especially what you offer that is unique and protects your AI insights for your brands).  I would hope they at least A/B tested this or something to some extent. 
Title: Re: SFIX - Stitch Fix
Post by: ajc on January 19, 2019, 03:31:07 PM


Thinking about the question about why no regular retail portal some more, if you have a portal, this encourages price shopping on multiple sites.  When you get a fix, the endowment effect kicks in even if you do look at other products that you could have bought from other portals.  Additionally not having a portal also has an advantage so competitors dont know what you offer (especially what you offer that is unique and protects your AI insights for your brands).  I would hope they at least A/B tested this or something to some extent.



Great points. I especially like the second one and how it stops competitors from getting any idea of their full offering.

There are two other aspects which might be worth adding to the endowment effect:

- The only other instances where people receive mystery gifts, tend to be for events like birthdays, Xmas, and so on. Happy occasions and important ones. I can't be 100% on this, but I imagine that since youth a lot of us are wired to respond very positively and strongly to that kind of thing.

- The second aspect is the way in which their current model means you get your own personal stylist. I've read of a number of situations where clients develop extremely good relationships with their stylists, but I think even those who don't, might feel more of a human bond with Stitch Fix than other retailers as a result.

I think those two aspects both assist with retention since they give Stitch Fix time, first because of the initial surprise and unexpectedness, and later because of the bond formed with your stylist, to find the exact right mix for you.
They also segue well into one another, since once the initial fun and mystery starts to wear off, the relationship begins to deepen and more trust and bonding is in place.

My guess is the combination of all that results in some relatively valuable incentives.


Title: Re: SFIX - Stitch Fix
Post by: Gregmal on January 31, 2019, 08:01:40 PM
So as part of my research, I tried placing an order with them.  Here’s how it went in case anyone’s interested:

I first had my wife create an account with them.  They made her answer a very long list of questions about her physical appearance (height, weight, other measurements, age, …) and preferences (which body parts she wants to (de-)emphasize, personal colors, favorite brands, preferred price range, …). 

Then I had her place an order, with a note attached telling them pretty much exactly what type of item she wanted (blouse, sweater, …) and for what occasion (work, casual, …), along with a few other special notes/requests (how conservative the office environment is, fabric quality, …).

It took over 2 weeks for the items to arrive.

The items that arrived were all of good quality and fit perfectly, and all special requests were honored.  Out of the 5 items that arrived, 2 were excellent picks (much better than what was expected), 1 was shall we say “adventurous” (a bold design that she had never tried before), and 2 didn’t work in terms of color/style and were sent back.  They asked for detailed feedback on each item as part of the check out process.

In total, she spent about $220 total on 3 items. 

I tried to do a price comparison online but that wasn’t really possible because the exact same products were nowhere to be found (including those from very well-known brands, interestingly).  But my very rough guess is that she probably could have bought comparable items for about $150 elsewhere. 

So was this a good deal?  For one thing it was certainly a nice time saver — it probably would have taken her at least a few hours searching around and trying things on to get the items she got from another seller.  Our personal circumstances are such that spending $70 or so to save those several hours is worthwhile, but of course not everyone will feel the same way.  Also, return shipping is really easy for us because we live in a building where we can just leave the package with the front desk concierge, but I think it’s a much bigger hassle for many other people. 

And most importantly:  My wife was pretty happy about the experience and wants to place another order.

Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.
Title: Re: SFIX - Stitch Fix
Post by: ajc on February 05, 2019, 04:37:16 AM

Great, quick read about the various, detailed ways in which Stitch Fix is uniquely positioned to help brands save on production costs and expand into products they hadn't previously considered.

This also likely allows brands and Stitch Fix to charge a premium given that they're located more towards the indispensable side of the spectrum.
Brands get super accurate and holistic client insights, while clients get fits and designs that feel intuitively better on every score.

https://fashionista.com/2019/02/stitch-fix-plus-size-data


Title: Re: SFIX - Stitch Fix
Post by: SHDL on February 05, 2019, 02:22:00 PM
Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.

It’d be funny if they received similar items/service because Stitch Fix somehow figured out that we are communicating on CoBF.  Super creepy, but you never know these days…
Title: Re: SFIX - Stitch Fix
Post by: Gregmal on February 05, 2019, 04:07:03 PM
Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.

It’d be funny if they received similar items/service because Stitch Fix somehow figured out that we are communicating on CoBF.  Super creepy, but you never know these days…

Yea IDK. I never like to go buy something just because of a good experience, but the reaction from my wife(a boring accountant type, of course said and meant in the most positive but descriptively helpful way in terms of communicating) really kind of opened my eyes to the stickiness of this. Its almost a compounding effect once the user realizes the more they use the product the better the service algorithm understands them. Then they can't wait for their next order. And hey! If I dont like it, I can just return it. This is a very, very unique company. I have no position yet but am currently conducting due diligence and like that the share price seems to be lagging in hopes of me harvesting other winners and allocating before take off!
Title: Re: SFIX - Stitch Fix
Post by: ajc on February 27, 2019, 05:46:41 AM

Fast Company recently wrote a long read on Stitch Fix (https://www.fastcompany.com/90298900/stitch-fix-most-innovative-companies-2019), after they included them in their 2019 'Most Innovative Companies' list.

The piece was quite positive (as you'd expect), but not unbalanced. It included a number of specific, nuanced insights into how Stitch Fix creates tangible value for both clients and labels.
The article also describes some smart new things Stitch Fix have done to increase accuracy and client retention.


Title: Re: SFIX - Stitch Fix
Post by: cameronfen on February 28, 2019, 03:23:31 PM
So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

However I recently came across
this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/
and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat. 
Title: Re: SFIX - Stitch Fix
Post by: Jurgis on February 28, 2019, 03:43:19 PM
So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

However I recently came across
this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/
and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat.

I'd think SFIX might have a moat in the intersection of their data, customers, and manufacturers. I.e. using data for matching, but also for both customer and manufacturer suggestions/feedback/planning/pricing/models/etc.

In some sense the scale is still a moat.

If these AI clothing startups can figure out how to efficiently procure clothes to match their AI suggestions, then perhaps SFIX won't have much lead apart of the first mover advantage.

Edit: the real disruptor would be AI suggestions + make-clothes-on-demand--fast-and-cheap. That would kill pretty much whole industry.  8)
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on February 28, 2019, 04:27:43 PM
So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

However I recently came across
this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/
and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat.

I'd think SFIX might have a moat in the intersection of their data, customers, and manufacturers. I.e. using data for matching, but also for both customer and manufacturer suggestions/feedback/planning/pricing/models/etc.

In some sense the scale is still a moat.

If these AI clothing startups can figure out how to efficiently procure clothes to match their AI suggestions, then perhaps SFIX won't have much lead apart of the first mover advantage.

Edit: the real disruptor would be AI suggestions + make-clothes-on-demand--fast-and-cheap. That would kill pretty much whole industry.  8)

That's probably true, that they are an aggregation of middleman, styling and distributor and provide value by aggregating these fragmented businesses, but I don't think that provides an advantage over any other subscription or retail store.  I wonder are they large enough so they dont get into the same dynamic as meal subscription services where they are forced to acquire customers at a low LTV/CAC ratio because otherwise they will not get funding.  SFIX, has a similar dynamic as they are in a low margin business, but I assumed the AI styling would fend off competitors.  But I think other companies like rockets of awesome and kidbox are moving into the space and seem unfazed at SFIX advantage. 

At the same time I'm sure there are startups that are trying to do your last comment (ai clothes design), and think this could be done relatively easily for a startup. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on February 28, 2019, 05:30:37 PM
I don’t see this company as a clear threat, at least for now.  They’ve essentially figured out a way to automate part of what human stylists do at Stitch Fix - coordinate clothing items so that they go well together aesthetically - and built a B2B business out of it.  Furthermore, the key idea is so obvious that I’d be surprised if Stitch Fix were not doing something similar internally.  Also, scraping photos off of Instagram is something anyone can do, whereas replicating Stitch Fix’s database is not so easy.

That’s not to say that Stitch Fix is competition-proof or anything, but this company doesn’t seem too scary.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on February 28, 2019, 06:30:58 PM
I don’t see this company as a clear threat, at least for now.  They’ve essentially figured out a way to automate part of what human stylists do at Stitch Fix - coordinate clothing items so that they go well together aesthetically - and built a B2B business out of it.  Furthermore, the key idea is so obvious that I’d be surprised if Stitch Fix were not doing something similar internally.  Also, scraping photos off of Instagram is something anyone can do, whereas replicating Stitch Fix’s database is not so easy.

That’s not to say that Stitch Fix is competition-proof or anything, but this company doesn’t seem too scary.

I guess my point is I dont see any reason why stitch fixes database could train an algorithm any better than this publically availible data, if Sfix augmented there data with Instagram that gives them an advantage, but how much, it could be quite small and opens the door to competitors.  This company is not the only one doing these things which is why it worries me. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on February 28, 2019, 06:48:35 PM
Good question. The way I see it is that the value proposition with Stitch Fix is that I can tell them to get me, say, a sport jacket that I can wear to a concert at Carnegie Hall along with a dress shirt and a pair of shoes that go well with them — and then they send me some items that work well for me without taking any more of my time.  And that is something that these guys won’t be able to deliver given the data they have (assuming it’s just a collection of Instagram photos), regardless of how good their AI algorithms are. 
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on February 28, 2019, 07:19:07 PM
right that makes sense.  So the moat here is that they have your history.  Hmm I'll have to think about that if I think that can deter other entrants. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on March 01, 2019, 05:42:44 AM
Right, competition is the key risk factor to keep in mind if you’re long. 

One good thing about the company is that they have a business model where product quality (i.e., how good the styling service is) improves with usage (i.e., how many people use the service and provide feedback), which means they have a shot at establishing a dominant position where they’re really hard to compete against because their product works so much better than what others can offer.  That’s why I think there’s great potential here. 

But of course the wrinkle here is the lack of certainty as to whether they manage to realize their full potential.  The most bullish view I guess is that they’re already so far ahead of the competition that no one can catch them.  A bearish view would be that someone else will soon come in with a similar but superior product and crush them.  It’s also possible that they end up being part of an oligopoly where there are several dominant and successful players.  I guess you just have to make a judgement call as to the likelihood of each outcome and invest accordingly. 
Title: Re: SFIX - Stitch Fix
Post by: ajc on March 01, 2019, 12:19:21 PM

So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

However I recently came across
this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/
and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat.


Thanks for the link. There's a few things that come to mind after reading this.

One, is that apparel on both the label and retailer side is far from a winner-take-all industry. In fact, it's highly fragmented (see image below).
In other words, if you own one of the top 5 retailers that millennials and others eventually gravitate strongly towards, then your chances of losing your principal are less than if you invested in the ride-sharing company that went up against Uber and Lyft.
Looking through that list below, you can pick out numerous businesses that were well-run, had good models, and ended up delivering very reasonable returns for many years if you invested in them shortly after the IPO.
So, I'd say keep in mind the nature of the industry and its participants.

The second thing relates to something SHDL said. Artificial intelligence right now is great at doing certain things, but not so great at other stuff.
One of the things it's bad at is to be "able to read a newspaper or do all sorts of things that will still be the provenance of human beings. Basically, anything physical, linguistic, or design-related is still going to be the provenance of humanity for the foreseeable future" (paragraph 26, https://www.theringer.com/tech/2018/11/8/18069092/chess-alphazero-alphago-go-stockfish-artificial-intelligence-future).
As SHDL noted, Stitch Fix is a business where you can "tell them to get me, say, a sport jacket that I can wear to a concert at Carnegie Hall along with a dress shirt and a pair of shoes that go well with them."
The AI demonstrated in the Forbes article might be good for a narrow range of run-of-the-mill, standardized outfits, but one of the main functions fulfilled by the human stylists at Stitch Fix is that they perform those tasks that AI can't.
Put differently, Stitch Fix stylists can interpret, gather context, and make judgement calls, all of which machines are unable to figure out with any real accuracy.
While I can see an Intelistyle option potentially being suitable for some people out there, I think it's just not going to cut it overall for the majority of online shoppers who might have specific requests, exacting standards, or complaints about the fit, texture, and so on.
For that, Intelistyle would need to hire a team of human interpreters anyway and since Stitch Fix already has that, plus the warehouses and distribution, plus the relationships with top labels, it's difficult to see how Intelistyle might end up destroying Stitch Fix by copycatting it.

This kind of leads to my last point, which is that Stitch Fix was really built around the idea of "a truly personalized shopping experience (https://newsroom.stitchfix.com/wp-content/uploads/2016/08/Stitch_Fix_AllBios.pdf)." To my mind, the stylist relationship plays an important part in that.
For me anyway I mostly shop on a functional basis, but for many people out there (women in particular, if I can make a general - and hopefully not overly offensive - estimate), clothes shopping is often a somewhat social activity and in a cold, algorithm-run world that we speedily seem to be headed towards, there's something about that which could turn out to be quite valuable even if it's not put-downable right now on a balance sheet or income statement.

Another thing worth emphasizing is that Lake has hired an "executive team from major companies such as lululemon, Netflix, Nike, Sephora and Starbucks."
If you read about her history, I think you'll likely conclude that's no accident. One thing most of those companies have in common is that they've essentially taken a commodity product and created a customer experience and aura around themselves that has allowed them, if I can use a Buffettism, to get 'share of mind.'
Making coffee, lycra, or make-up, isn't rocket science. However, I think one thing that Stitch Fix does really well is marry the technology with the personal psychology of apparel shopping in a way that really pleases clients (https://www.today.com/parents/it-was-kind-how-stitch-fix-fashions-fans-true-acts-t100208) and labels to a far-higher-than-normal degree.
To my mind that's not something to be written off easily, nor is it something where someone else can necessarily just step in and replicate it, just because they've got a great AI-related discovery.
Building a business and a brand in the way that Stitch Fix has is hard, and so while I won't write off any competitors sight-unseen, I will say that until they start posting some really impressive numbers and glowing reviews from customers and labels alike, in the way that Stitch Fix has almost continually done since 2011, I'd say the onus is more on them to prove that they're going to take everyone else's share at the press of a button, rather than the other way round.

Basically, that'd be my 2-cents worth of a rebuttal since I'm making one. Then again, I've been tracking the company, somewhat admiringly, since about 2013 so if anyone here is biased and worth ignoring, it's definitely me. Oh well, so it goes.


Title: Re: SFIX - Stitch Fix
Post by: cameronfen on March 01, 2019, 06:35:57 PM
^ comment on the above. 

1.  While I think that retail is fragmented business model, I think delivery kit businesses like hello fresh are less that way.   This probably benefits SFIX as they are the market leader though. 

2.  Mainly regarding the AI.  I have some expertise in the area and in my opinion, lots of things that are "distinctly human" machines can do quite well.  Basically if you can quantify the cost of making a decision (ie can define a good loss function) and have very structured data (i.e. x is good, x2 is bad) machines can learn these things very well.  For example translation used to be thought of as distinctly human, but we have lots of data from the UN and so state of the art neural networks can now translate almost as good as the top humans in the languages we have lots of data in.  There is a soundcloud interview further upthread I think, where Lake admits that restricting the top 30 styles for stylists to pick instead of top 50 leads to more purchase as when stylists are confident there pick is better than the machine they are usually wrong. 

I think stylist do add something for example need a outfit for a concert which machines cant yet implement, but wouldn't be surprised if machines do more and more "distinctly human" tasks

Additionally thinking about the Forbes article a little more, it is very likely they are using a generative algorithm which can generate good styles, but if you gave it data like the person is 5'6" and likes floral patterns pick an outfit it wouldn't be able to do that, mainly because it doesnt have that data.  Would extracting the more supervised component be difficult?  I think so, but I didnt think how one could do this and there are a lot of smart people and they could think of something I'm not thinking of. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on March 05, 2019, 11:50:00 AM
On AI, my understanding is that the current generation of algorithms are limited by the fact that they still have trouble learning something in one context (e.g., learn what type of place Carnegie Hall is by reading a NYC guidebook or something) and then applying the knowledge acquired in another (e.g., pick a clothing item that’s appropriate for someone who’s planning to visit the place).  So that would be one area where human stylists should still have an edge. 

Now whether things stay that way remains to be seen, but a good thing about this business is that by having a system where human stylists and AI algorithms work together,  they are set up in a way that should allow them to adapt flexibly to any changes in technology.  For example, if 5 years from now their AI algorithms still don’t have the “common sense” to go to a concert hall’s website to check if there are any dress codes when it needs to, then they can just have their human stylists continue to take care of that.  Or if their technology ever reaches a point where everything can be automated, they can adapt to that as well.  I like that much better than, say, someone else who might be betting their company’s future on an unproven technology that may or may not work.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on March 05, 2019, 02:05:39 PM
Right as of right now, if you can't clearly define the objective in mathematical terms like numerical reward the algo won't know what to.  Like right now algos, can't know the search google to find a picture of what the Eiffel tower is.  Because it's unlikely you can devise a bunch of punishments and rewards to quantify the general concept of what search engines can do. 

However once you even have (lots of) data of experts doing something correctly, then even if you dont have a loss function you are golden.  But again, if I show the computer how to search for pictures of buildings by expert demonstration, it probably still can't learn how to search for flights on google flights as progress in these fields (transfer learning, domain adaptation) are not even close to that sophisticated. 

So stylists do play some role still that machines cannot.  But computers can already do many sophisticated tasks like for example they can put a box around frisbie in a picture when you give a sentence "the man through a frisbee to a dog" to the machine with the word frisbee underlined. 

All this is a moot point though in some way as stylists arent sfix competitive advantage.  Anyone can hire a bunch of stylists to pick styles.  It may build customer retention but the act of stylizing is basically a commodity input.
Title: Re: SFIX - Stitch Fix
Post by: ajc on March 12, 2019, 04:52:04 AM

Stitch Fix reported their Q2 results yesterday evening.

- Active clients increased by 18% YoY
- Net revenue increased by 25% YoY
- Gross margin grew to 44%
- Revenue and EBITDA guidance for Q3 and FY2019 were both raised
- Free cash flow grew by 79% YoY

https://investors.stitchfix.com/static-files/9de744a5-5584-4e0d-8828-5587d1b1518f


Title: Re: SFIX - Stitch Fix
Post by: Castanza on March 12, 2019, 05:41:36 AM
Almost pulled the trigger on this two months ago. I just can't stomach the business for some reason. Not something I feel comfortable buying into. It's expensive, not completely unique, can easily be replicated (see blue apron clones) which will eventually bring razor thin margins. And it seems like a fad that won't be sustainable if we see any type of economic slowdown. I know people who have used it and said it's not really worth it (anecdotal). I'd just rather park my money somewhere else.

That being said, I can see them being a buyout target in the future. SFIX is best in class at what they do and as mentioned above they have the most data scientists etc. Now, that doesn't necessarily mean anything.

If you had a position, congrats!
Title: Re: SFIX - Stitch Fix
Post by: SHDL on April 15, 2019, 12:31:38 PM
Apparently Amazon is testing a me-too service:

https://www.barrons.com/articles/stitch-fix-stock-falls-amazon-prime-wardrobe-stylist-51555343917

It should be interesting to watch how this goes. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on April 16, 2019, 01:37:55 PM
… and Walmart too, lol:

https://www.cnbc.com/2019/04/15/walmart-launches-its-first-subscription-box-for-apparel-with-kidbox.html
Title: Re: SFIX - Stitch Fix
Post by: Jurgis on April 16, 2019, 11:55:47 PM
… and Walmart too, lol:

https://www.cnbc.com/2019/04/15/walmart-launches-its-first-subscription-box-for-apparel-with-kidbox.html

You too now can own perfect Britney Spears wardrobe.
Title: Re: SFIX - Stitch Fix
Post by: ajc on April 17, 2019, 06:53:51 AM


Apparently Amazon is testing a me-too service:

https://www.barrons.com/articles/stitch-fix-stock-falls-amazon-prime-wardrobe-stylist-51555343917

It should be interesting to watch how this goes.



I saw that. Without wanting to sound complacent, I guess I see this as vindication more than anything.
Almost a year after they debuted Prime Wardrobe and 8 years after Stitch Fix was founded, probably the world's best e-tailer has finally admitted the Stitch Fix model is the one they need to be copying.
This after Stitch Fix has already established its dominance over other players (Trunk Club, etc) in the personalized apparel styling market.

I wrote either in my original thesis or the following pages, how I thought it would play out once Amazon got in this game.
The issues I see for Amazon are that designers and labels would much rather work with little, friendly Stitch Fix instead of the 800-pound gorilla that has a reputation for copying your products once they know how, slitting your throat, then pushing your lifeless body into the Puget Sound.

Another issue for Amazon is they have a reputation (deserved or not) as fast and cheapish. For most products that's a positive, but for fashion that's not necessarily the case. Stitch Fix has positioned its brand as more upmarket and so I think it's more likely to be thought highly of in terms of consumer options than Amazon's offering. In other words, there's a kind of snob appeal that matters. McDonalds coffee has improved a lot in recent years, but people still prefer to pay a little more for Starbucks and walk around with that cup because it has greater cache and the customer experience is higher quality.

Related to that, I kind of wonder how good the Amazon service will actually be experientially. I worked at Amazon for a few years and part of their culture is to make things as bare-bones and functional as possible. It keeps them lean and efficient. On the other hand, the place is also very functional and cheap as opposed to being classy and fashionable. I suppose I have my doubts that a place with such an ingrained culture of frugality, directness, and robustness, has the subtlety, suaveness, and aesthetic appreciation, to really beat Stitch Fix at their own game?
That's not to say Amazon won't execute very well and design something that works properly, but as I said above there's more to the success of a Starbucks than great execution. There's a certain perception of their brand they create in consumer minds, and in how the company and its people relate to you, that allows them to charge a premium and Amazon's culture has always blatantly and loudly been about the exact opposite in many ways.

The final thing about Amazon is that Stitch Fix has a massive head start. Eight years to be exact and so they have had a ton of time to make the big mistakes they needed to make, understand the strengths and weaknesses of a new industry model, etc, etc. I won't deny that Amazon is a ferocious competitor, but Lake and company are the best in their industry (which they've proven repeatedly) and very smart about their decisions and execution.
So while there's no way I'd write Amazon off, I do think that even if you assume they execute 2x as fast and well as anyone else could, that still gives Stitch Fix a four year lead.

On Walmart, I've got a ton of respect for Marc Lore. He competed head on with Amazon during his Quidsi days and if he's their next CEO then they'd have got a bargain with their Jet.com purchase. However, I'm not too phased by them for a few reasons. One is that Walmart has an even worse reputation for classiness than Amazon. The idea that some housewife from a wealthy neighborhood is going to shop via Walmart for high quality, personalized clothing is hard to believe. On the other hand, she may well be willing to go for Stitch Fix's Premium Brands offering. Also, as far as I know Lore has zero experience in apparel retail so Walmart would have a long way to go learning-wise if they wanted to have an upmarket offering there.

As I said in the beginning I think this is more a confirmation of how good the Stitch Fix model is than anything else. I'd also add that there are some very good reasons why just having a frugal, efficient executing mindset is not nearly enough in this industry and that being approached by an unfriendly megacap is not something designers are necessarily going to feel good about. I think all of that adds up to a lot of opportunity for Stitch Fix to position itself as the smarter, more experienced, and classier, alternative channel on both the customer and fashion label side. I'd be pretty happy if Stitch Fix leaned more towards the high end, in reality and in consumer's minds, and others could then still do okay on the low end.

Title: Re: SFIX - Stitch Fix
Post by: SHDL on April 17, 2019, 07:10:05 AM
I agree with pretty much everything you wrote. 

My wife is now completely sold on Stitch Fix, btw.  They must now have at least 70% of her total apparel spending.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on April 17, 2019, 07:13:28 AM
^ to add on no one has the data on what styles people want other than SFIX.  You have that virtuous flywheel.  Also if you look at other ecommerce companies (Etsy, Wayfair), many ecommerce companies survive Amazon when it moves into their markets. It's the retailers that suffer. 
Title: Re: SFIX - Stitch Fix
Post by: ajc on June 06, 2019, 06:51:44 AM

Earnings call
https://edge.media-server.com/m6/p/d4vx87vw

Shareholder letter, earnings slides, and financials
https://investors.stitchfix.com/static-files/dbfc1359-c683-4b73-b27f-07e5370cfda2





Encouraging earnings report and super informative conference call Q&A. Revenue grew 29%, gross margin improved, balance sheet is solid, Style Pass has increased client spend, Style Shuffle has given them a ton of data and helped them retain more first-time Fixers, plus the part in the call about them being quicker to adapt to trends because of better insights and higher inventory turnover was interesting from a competitive standpoint. I also liked how they're taking a conservative approach to the UK and think it's great that Kids is performing well given how quickly little folk tend to grow out of clothes. That could become a nice vertical for them.

That said, I've sold some of my position. It was 25% or so of my portfolio on January 1st and it has returned 70% since. Currently I'm more bearish at a market-level on growth and tech stocks than I have been for years, so I've been raising cash and limiting equity exposure. It's still my largest position and I like it long-term, but for now I think it's prudent to cut back so I've trimmed quite a bit. I also have one or two questions about whether clients might decrease Stitch Fix spending in a recessionary environment and how the stock price would react. I'm not crazily concerned because I think the average Fixer is less price-sensitive than folks at the budget end of the market, but it's something I keep in mind.

Anyway, so far this has been a decent investment for me and I'm still confident in management and their ability to continuously evolve and adapt the business model over time.


Title: Re: SFIX - Stitch Fix
Post by: ajc on June 25, 2019, 01:11:07 PM

Sold most of my Stitch Fix.
Still think it's a great company, but I'm very concerned with valuations in the new tech IPO sector currently. If multiples fall back to reality, everything in the space will likely drop far down with it.
I wrote about my valuation fears here (https://twitter.com/tonyjclayton/status/1118205158721249280) and here (https://twitter.com/tonyjclayton/status/1142741798554624000), for those wondering about the rationale.
My view is if the sector is genuinely in bubble-like territory, then it's better to accept mediocre returns for a year or three instead of trying to time my exit exactly on the stroke of midnight.
The latter is not something I'm sure I know how to do, while the former is something I think I can say is the case with a relatively high degree of certainty.

Title: Re: SFIX - Stitch Fix
Post by: mattone on July 30, 2019, 09:13:15 AM
AMZN launching Personal Shopper for $5/month - now directly competing with SFIX.

https://www.vogue.com/article/amazon-prime-personal-shopper

https://www.amazon.com/b?linkCode=w50&imprToken=VNrUraIaqFY8nbN5wg7ajA&slotNum=1&node=19190471011&ref_=pss_fq



Title: Re: SFIX - Stitch Fix
Post by: Castanza on July 30, 2019, 10:00:35 AM
AMZN launching Personal Shopper for $5/month - now directly competing with SFIX.

https://www.vogue.com/article/amazon-prime-personal-shopper

https://www.amazon.com/b?linkCode=w50&imprToken=VNrUraIaqFY8nbN5wg7ajA&slotNum=1&node=19190471011&ref_=pss_fq

I always though SFIX would be a good acquisition target for Amazon. I wonder if that will ever been in the cards?
Title: Re: SFIX - Stitch Fix
Post by: Saluki on July 30, 2019, 10:21:17 AM
AMZN launching Personal Shopper for $5/month - now directly competing with SFIX.

https://www.vogue.com/article/amazon-prime-personal-shopper

https://www.amazon.com/b?linkCode=w50&imprToken=VNrUraIaqFY8nbN5wg7ajA&slotNum=1&node=19190471011&ref_=pss_fq

I always though SFIX would be a good acquisition target for Amazon. I wonder if that will ever been in the cards?

It's very possible.  Amazon tried to take on Zappos (which I loved, and didn't mind paying extra for) in the shoe market and couldn't make any headway so they just offered Tony Hsieh a ton of money and told him he could run it like a Berkshire subsidiary (hands off) and he took the deal.   
Title: Re: SFIX - Stitch Fix
Post by: SHDL on August 23, 2019, 05:30:59 PM
Just a heads up for anyone who has an appetite for GARP investing after a nice red day.  The stock price has come down significantly over the last two months or so and is now back to where it was in December, short interest is way up & so is implied volatility.  Mr Market really hates this stock now, it seems.  The general rockiness in the retail sector and the introduction of Amazon’s “me too” service may have something to do with it, but even so the level of negativity implied by the stats is quite something. 

I already had a small flyer position but I just increased it to something more meaningful.  It’s still a high-risk-high-reward type of investment in my book but I think the odds are in my favor now. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on September 01, 2019, 08:57:01 AM
Stitch Fix just acquired what I believe is an early stage startup called Finery:

https://www.yahoo.com/lifestyle/stitchfix-acquires-digital-wardrobe-startup-finery-201018873.html

Based on what I've seen I think the intention here was to acquire some IP/technology that will allow Stitch Fix to see (with permission, of course) what clothing items their members have purchased from other retailers online.  If so, this is a good move.
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on September 01, 2019, 12:04:17 PM
Stitch Fix just acquired what I believe is an early stage startup called Finery:

https://www.yahoo.com/lifestyle/stitchfix-acquires-digital-wardrobe-startup-finery-201018873.html

Based on what I've seen I think the intention here was to acquire some IP/technology that will allow Stitch Fix to see (with permission, of course) what clothing items their members have purchased from other retailers online.  If so, this is a good move.

I'm not in SFIX anymore (I have a rule if I want to buy a stock but its expected return is worse than google I just buy google). However, often when a company is slowling down its growth (ie the C-suite knows it but its unclear for investors) they will buy another company to distract wall street.  I don't know if this is what management is semi conciously doing but I wouldn't be surprised. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on September 01, 2019, 01:03:53 PM
Stitch Fix just acquired what I believe is an early stage startup called Finery:

https://www.yahoo.com/lifestyle/stitchfix-acquires-digital-wardrobe-startup-finery-201018873.html

Based on what I've seen I think the intention here was to acquire some IP/technology that will allow Stitch Fix to see (with permission, of course) what clothing items their members have purchased from other retailers online.  If so, this is a good move.

I'm not in SFIX anymore (I have a rule if I want to buy a stock but its expected return is worse than google I just buy google). However, often when a company is slowling down its growth (ie the C-suite knows it but its unclear for investors) they will buy another company to distract wall street.  I don't know if this is what management is semi conciously doing but I wouldn't be surprised.

That is something to watch out for.  My sense is that the target company in this case is pre-revenue, though I might be wrong.  Also Stitch Fix hasn’t even bothered putting out a press release.  If distracting Wall Street is the objective they need to try harder...
Title: Re: SFIX - Stitch Fix
Post by: cameronfen on September 01, 2019, 02:02:26 PM
Stitch Fix just acquired what I believe is an early stage startup called Finery:

https://www.yahoo.com/lifestyle/stitchfix-acquires-digital-wardrobe-startup-finery-201018873.html

Based on what I've seen I think the intention here was to acquire some IP/technology that will allow Stitch Fix to see (with permission, of course) what clothing items their members have purchased from other retailers online.  If so, this is a good move.

I'm not in SFIX anymore (I have a rule if I want to buy a stock but its expected return is worse than google I just buy google). However, often when a company is slowling down its growth (ie the C-suite knows it but its unclear for investors) they will buy another company to distract wall street.  I don't know if this is what management is semi conciously doing but I wouldn't be surprised.

That is something to watch out for.  My sense is that the target company in this case is pre-revenue, though I might be wrong.  Also Stitch Fix hasn’t even bothered putting out a press release.  If distracting Wall Street is the objective they need to try harder...

Sure it might not be the case.  But often its subconcious.  Growth is slowing down so lets do something.  If there are plenty of reivestment oportunities for capital why buy someone else?  There does seem like there are synergies here, but I also get the impression they are fishing for opportunities to expand TAM in a way they wouldn't do if they didn't see the writing on the wall. 
Title: Re: SFIX - Stitch Fix
Post by: SHDL on September 01, 2019, 02:54:07 PM
If there are plenty of reivestment oportunities for capital why buy someone else? 

One good reason would be if they can buy some useful technology cheaper than it would cost to develop internally.  Or if there is a patent involved (which seems to be the case here).

But of course this is mostly speculation at this point.
Title: Re: SFIX - Stitch Fix
Post by: KJP on December 08, 2020, 12:29:33 PM
What is the bull case here, and can it be justified by the financial results to date? 

The business is currently slightly unprofitable but claims to have a big data advantage that creates a highly scalable business.  [See here:  https://investors.stitchfix.com/static-files/2b87b6c8-0ca7-4c48-a8de-b024ac0da5ef]  If that were true, margins ought to expand as the company grows.  But the reverse appears to be happening on every metric.   For example, SG&A ex-advertising has increased from 32% of revenue in 2016 (and in 2018 for that matter) to 37% of revenue in 2020, despite sales growing from $730 million to $1.7 billion.  [Note that I refer throughout to fiscal years, which end in July.]  Drilling down a bit more, from 2018 to 2020, SG&A ex-advertising increased from $389.9 million to $637.2 million, or about a $250 million increase.  The 10-Ks say that the increase primarily comes from additional compensation for data scientists and engineers.  But over those two years, the company added only 60 engineers and 45 data scientists.  Those 105 additional employees can’t be the main driver of $250 million of increased costs. 

I could not find any detailed breakdown of SG&A in the 10-K.  But they did disclose that from 2018 - 2020 they added at least 1,000 additional “stylists” and fulfillment employees.  Importantly, the work of these employees does not appear to be nearly as “scalable” as the work of a data scientist.  Instead, they appear to be much more of a variable cost, unless the stylists are eventually replaced by artificial intelligence.

Advertising expense also appears to be becoming less efficient as the company has to push harder to identify new customers.  I didn’t see disclosure about churn, so here are the numbers on total advertising spend and year-over-year change in active customers:

2016:  $25 million; 807,000
2017:  $70.5 million; 520,000
2018:  $102.1 million; 548,000
2019:  $152.1 million; 494,000
2020:  $167.8 million; 286,000

Every year they are starting from a larger base and thus larger absolute churn, so they have to spend more absolute dollars each year just to stand still.  But I don’t know the churn numbers, so I cannot determine the number of “new” customers and the unit economics of each.  On their face, however, those advertising numbers suggest to me that for several years the company has been finding it harder and harder to grow efficiently. 

So, we have a company that is around breakeven or slightly unprofitable as things stand.  The company would have us believe that scale will solve that, but the line items that ought to be scaling (SG&A ex-advertising) are going in the wrong direction and advertising spend appears to be getting less efficient.  Moreover, in the company’s own “long-term model,” it projects ~11% EBIT margins, essentially all of which it projects to come from SG&A ex-advertising going from 37% of revenue to 25% of revenue, exactly the same line item that, as discussed above, appears to be going backwards and appears to have significant components that are not particularly scalable.  [See slide 18 of the presentation linked to above]

Despite all of that, the stock soared to what I believe is an all-time high today because they had a good quarter of adding new clients (but no margin improvement) and a rosy revenue projection for 2021.  So, I’m back to where I started:  Can the existing public information justify paying $50/share for this?  If so, what am I missing? 
Title: Re: SFIX - Stitch Fix
Post by: Spekulatius on December 08, 2020, 03:49:24 PM
My Tikr showed a ~20% cumulative  short position for SFIX. The better than expected earnings report likely scared them and contributed to the stocks ascend. #nevershort.
Title: Re: SFIX - Stitch Fix
Post by: TBW on December 09, 2020, 04:27:57 AM
I think this is a bit of rorschach test. I have had a small long for a while now, and can somewhat see both sides. In summary, I think SFIX is doing better than you think but unless the new initiatives work out, scepticism here is warranted.

To start, SFIX business has been to mail clothes to a person who then keeps or sends it back. The secret sauce, if it exists and I think it does, is the AI that selects the clothes. The market for people that want this service is somewhat limited and I think that, and the pandemic, explains the lack of scale on the ad spend side.

But now SFIX is branching out and is creating personalised online shopping where the AI selects what you see. The big idea is that online shopping can be more interesting and a chance to find new stuff like the traditional store browsing experience, that due to the AI you are picking from items that you are likely to like, this is different than the current online model where typing in socks into amazon yields many generic options and you tell the store what you are looking for. The market for this is magnitudes higher than the current market SFIX is targeting. There is also adjacent areas where other brands may pay SFIX to advertise amongst their curated offerings. The lack of scaling in SGA costs is due to these investments. This is similar to many tech companies where capex flows through income statement. There is other interesting 'flywheel' type aspects in their relationship with suppliers, but this is too long already to get into that, but there are many aspects to their business model that I think are really interesting.

Management at SFIX has been excellent. The whole operation has been mostly self funded with all money raised to date mostly sitting in cash on the balance sheet. The CEO, who I think is awesome, has a thorough deliberate approach to rolling out new projects constantly testing along the way. That also is part of the lack of scaling as there is a few year gap between capex and product roll-out.

From this perspective, the SGA and ad spend may not be as bad as it seems as the ad spend is building the brand and making the new 'platform' that they are building bigger when it is launched. Also the valuation isn't terrible at 2x 2022 sales (ex cash), given their recent growth, high gross margins, and future growth potential (altho I would say that long term 11% EBIT margins don't really justify high p/s ratios...).

If however, the new initiatives aren't successful then everything you pointed out is a real concern.

Other things I don't like are SBC is super high. I think it's annoying that companies exclude SBC from ebitda and speak about being profitable.

But it is overlooked that working capital helps fund this business.

Taken all together I come on the side that SFIX is not that expensive at its current price, and it is a company that could be significantly bigger in the future with an undemanding valuation (especially relative to most tech companies).

With some many large and dubious tech companies, that unlike SFIX are completely reliant on capital markets, I do find it strange that there is so much short attention on this name. So I do wonder what I am missing, so if there are other bear cases I should consider I would love to hear them.
Title: Re: SFIX - Stitch Fix
Post by: KJP on December 09, 2020, 05:16:29 AM
I did leave out some possible explanations for the lack of SG&A scaling.  As you note, they have been developing "direct buy," which if successful ought to raise margins by cutting out "stylists," i.e., replacing them with artificial intelligence.  They also have been expanding by category (women to men to kids to plus size and so on) and geography, so it's possible that they have some profitable scaled businesses subsidizing losses in the "start up" sections of the business.

So, I understand that there are plausible future worlds in which the company more than grows into its valuation.  But going back to my original question:  Is there anything in the historical financial statements of the company that would provide evidence that the optimistic outcome is likely?  Or instead is the current fundamental bull case built on a belief in Katrina Lake and the power of artificial intelligence to remake shopping for clothes (i.e., traditional online shopping with better and individualized curation)?

Note that I'm not saying such a bull case is wrong or unsound or anything else.  I'm just trying to pin down what inferences can reasonably be drawn from the historical financials relative to qualitative assessments of management, etc.

Regarding current valuation, I agree with you that it's not completely outlandish.  For example, let's assume the suggested 11% EBIT margin and account for taxes, making that about an 8.5% net margin.  At 20x earnings they'd need about $3 billion in sales to justify the current market cap ($5 billion/20 = $250 million/.085 = $3 billion).  Of course, I don't think the current model, with its significant non-scalable SG&A, would come close to those margins at $3 billion in sales.  But there is at least a coherent case for margin improvement and sales growth that could get you there.

EDIT:  A few more questions:  You referred to CapEx through the income statement.  I hear that alot, and it's certainly true to an extent.  For example, the salary of a data scientist or engineer you're paying to build a new digital offering gets expensed, whereas the construction costs of a brick-and-mortar factory get capitalized.  But how much of Stitch Fix's SG&A is actually this type investment?  More broadly, how do outsiders determine whether these types of claims by management (of Stitch Fix or any other business) are true?  Is it an assessment of who is being hired and the cadence of new product rollouts?
Title: Re: SFIX - Stitch Fix
Post by: TBW on December 09, 2020, 10:10:56 AM
I think those are very good questions and ones I have for many SaaS type companies.

The simplest, but largely accurate, answer is that investors don't know.

This is far from a usual investment for me, so I have struggled with some of the same questions, but I came away comfortable given the history. This is a company that has been very good with capital, that usually goes hand-in-hand with decent business sense. Operating within their means is very different ethos than most tech companies, and thus I think the capex spend is largely reasonable too. I also think that SGA cost increases since IPO largely have to be new investments, as what else is it? SFIX leases its facilities, it's just people, computers and data storage, in terms of costs. The big unknown to me is how much shipping costs run through SGA. The new business should see far less in terms of returns and that should help overall margins.

In my mind this is a bit of a story stock, where I happen to believe the story. Previously it was cheap, I thought, for the potential upside 'direct buy' had, and the likely stable, but growing, economics of the current business model. I don't know that there is direct proof that SGA difference is capex, as I stated, but I haven't been convinced of the converse yet either.
Title: Re: SFIX - Stitch Fix
Post by: DTEJD1997 on December 09, 2020, 10:31:44 AM
Hey all:

I have not been following this too close, but I do online sales.

There are some BIG changes/problems coming to online sales.

Packaging costs (boxes, tape, foam peanuts) are going up.  Some sub-categories have gone up 4 times in the past year or so.  The price increases have been small each time, but if something goes up in cost 2 or 3 or 4 percent each time, it adds up.  My suppliers have told me to expect more of the same.

Shipping costs, especially at USPS have gone up.  This is especially true on smaller, light weight packages.

Perhaps the biggest problem of all has been labor.  Here in Detroit, the Post Office is breaking down.  A lot of postal employees are single mothers/parents.  When Covid-19 hit, and skools closed, who is going to look after the children?  They are stuck at home.  So huge numbers of postal workers are not able to come into work.  My local post office sometimes does not even up to the public.  Most days, most of the front counter clerks do not show up.  So the management has to man the counter.  Mail is not being delivered on every route, on every day.  Some routes have gone to DELIVERY EVERY OTHER DAY.

Perhaps the worst of all, is that the distribution centers (for outbound packages) are completely overwhelmed.  Packages will come in and not get sent out for 3-4 days, sometimes the wait time to go out is OVER a week.  This is a bottleneck at the distribution center, which results in ultimate delivery times of sometimes 2 weeks.

To be fair to the Post Office, I have had tremendous delays, but no package has been lost OR not ultimately delivered.

I have now had to move a good percentage of my shipping to Fed-Ex or other providers.  Frequently, the cost is higher than USPS.  Fed-Ex, so far, has done a fairly good job, but even they have delays.  The delays at Fed-Ex are no where near as bad at USPS, but they are there.

I think ALL delivery services are going to have labor issues moving forward.  The cost of labor will be going up, and the price of delivery is going up.

Obviously SFIX gets a better deal than I do....but rates for EVERYBODY will be going up.  Couple that with increased cost of packing materials.  That is going to be a difficult head wind going forward.