Stitch Fix Has Sown Up A Good Clothing Business

Stitch Fix (SFIX) is a service that aims to upgrade your wardrobe right at home. They have embellished the story by talking about “using AI and data science” to make “the future of retail” for clothing. The company is offering 10 million shares at $18-20 with Goldman Sachs and JP Morgan leading the charge. At the mid-point of the range SFIX will be capitalized at just under $2B. (You can refer to the Stitch Fix IPO slides and SFIX IPO roadshow transcript too.)

Unlike prior efforts in this market SFIX is successful with 2.4 million customers and $1B in revenue with good margins and positive cash flow. Some may remember the Trunk Club which started up in 2009 and was targeted to men. Nordstrom (NYSE: JWN) bought Trunk Club in 2014 for $350M. At the time Trunk Club was said to be closing in on $100M in revenue. Since then things haven’t gone very well – Nordstrom recently wrote town their purchase by $200M to $150M. That came after growth was “slower than expected” and the company made moves to improve profitability which included layoffs.

How did SFIX succeed where others have failed?

They have figured out how to scale designers – the people that make your fashion choices. On average a SFIX designer spends 15 minutes to make selections for you.

The service is priced for profitability. It’s not cheap but for the right customer the value equation works. (see discussion below)

In-house “brands” help the company manage COGS to preserve their gross margins.

They are far better at marketing than most major apparel sellers.

As shown in the IV model the SFIX business is a good one in terms of returns – particularly for the retail apparel industry.

Even if we use the less optimistic scenario of 20% growth and a 10% operating margin the shares are still worth $30. That would put the shares at 2.5x sales which is much less than what Nordstrom paid for Trunk Club.