Stitchfix: I Expected an Ugly Baby but I Was Mistaken

Stitchfix isn’t what you would expect and that throws off bros on the internet. See the typical logic below.

I was one of these bros (not quite that bad, but still). I just dismissed them as another company that was burning cash and not growing fast enough considering cash outflow. Then I looked at the financials. Stitchfix isn’t a company running an inherently unprofitable business model. Stitchfix is borderline profitable. They have realistic profitability goals that they are working towards achieving. Stitchfix is not fueling their growth via debt.

Now that we have an understanding of what Stitchfix isn’t, lets talk about what it is. At its core, Stitchfix is a styling service. A personal stylist works with their knowledge and Stitchfix’s data to make personal recommendations (for a $20 fee, which is credited toward any purchases). Shipping is free. Keep what you like, return the rest for free. Automatic recurring orders can be set up.

Stitchfix has optionality. Now that it has built its customer base, it can start to veer into new segments like home goods, etc… Stitchfix has also leveraged its platform into direct buy (normal e-commerce purchases, outside of fixes) and curated styles based on previous purchases (no styling charge).

Stitchfix is founder-led by Katrina Lake. Katrina is only 38 years old and will continue to lead the company for a long time. Being led by a young founder leads to more experimentation. Stitchfix is a data driven company and has experimented with gamification of shopping. If Stitchfix is really a data company, not only will these games drive engagement, they will also be a means of collecting data. Make surveys fun again!

The valuation is very reasonable. Even with a jump of 50% over the past two days. Price to sales of 2.4x with long term potential net income margins of 12% seems cheap. Sometimes net income margin targets are crazy unobtainable, but I think that is an obtainable goal. Sales growth has been only okay, but if you look relatively at apparel industry, the growth is stronger. Inventory is in line (Stitchfix can sneakily move inventory, they literally decide what to ship to your house).

Would I ever use Stitchfix? Maybe? Definitely not now that I work from home and mostly pretend I’m Tarzan. But if a day did come where I thought my Target wardrobe was holding back my earning potential, I would consider Stitchfix. Above all else, Stitchfix is a lesson in being open. Stitchfix has its struggles, but it also has a lot going for it. Am I confident that Stitchfix will make it? No. Am I confident this is a risk I want to take? Yes. It is different and doesn’t fully jive with the world we live in. But I don’t invest for the the world we live in. I invest for the world we will soon live in.

Long $SFIX.

Author: fatbabyfunds

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