Excellent consumer sales on Black Friday and Cyber Monday helped boost the stock of online apparel retailer Stitch Fix Inc (NASDAQ:SFIX) nearly 24% to $23.08 at the close of trading Monday.
Investors in the company’s IPO, priced at $15, must be pleasantly surprised. The news was not all good when Stitch Fix listed November 17, with the stock dropping below the IPO price momentarily during the day. Before that, the company cut the price as well as the number of shares offered in the IPO. Originally expecting to garner a price in the range $ 18-$ 20, the company cut the price to $ 15 per share in the face of subdued investor interest. The IPO ultimately raised $ 120 million.
However, the strategy to launch the issue days before the Black Friday and Cyber Monday shopping events paid back the IPO-doubters in spades. With Cyber Monday sales at record-breaking levels, close on the heels of excellent Black Friday sales, a rising tide lifted all retail boats, Stitch Fix included.
For investors in the Stitch Fix IPO, Monday’s sharp jump is also a validation of their decision to invest. After all, shares in Blue Apron Holdings Inc (NYSE:APRN), a company that operates a similar business model (online meal kits), are down to $ 3.07 from their June 2017 issue price of $ 10. Indeed, someone called the latter “the poster-child for botched 2017 tech IPOs.”
From that point of view, Stitch Fix, at +54% on IPO, is way ahead.
But will the good times last?
Understanding Stitch Fix Inc (NASDAQ:SFIX)’s Unique Business Model
Stitch Fix melds the strategy troika of data analysis, fashion consulting and complex algorithms into its delivery of an online personal styling service for apparel.
The use of technology enables Stitch Fix to gain extensive insight into its customers’ buying habits, allowing it to make accurate sales pitches, ensuring customer loyalty and repeat orders. According to the company, of its 2.19 million active clients, 86% were repeat buyers in 2017. Pictured above is a typical Stitch “Fix.”
This is how it works. A prospective customer outlines her style preferences in an online survey. Based on the survey, as well as any access to social media granted by the customer, a fashion stylist at Stitch Fix sends over five items for approval on the scheduled date, against a one-time styling fee. The customer may choose to either return the items or keep them. Deliveries and returns are free.
For the customer, it’s like trying clothes on at a showroom, instead, it’s in the comfort and convenience of one’s own home. For a subscription, the company will send over shipments at regular intervals.
The survey data and its analysis allows the company to achieve a degree of personalization that is missing from the online market. “Our data can say, for example, this client has a 50% chance of keeping this denim,” says Stitch Fix.
Stitch Fix Inc (NASDAQ:SFIX): It’s All About The Management
Stitch Fix Founder and Chief Executive Katrina Lake is credited with having grown her business from next to nothing in 2011 to a turnover of $ 977.1 million in 2017, and that too with minimal venture capital financing of just $42.7 million.
Harvard educated, she was the first female CEO to take a company public in the US this year.
Key to her success have been the following mantras:
- Solving the problem of how to stand apart from a host of “me-too” online retailers, using personalization and an innovative delivery model
- Using advanced technology uncommon for a retailer, whether online or brick-and-mortar
- A huge emphasis on achieving profitability
- Husbanding cash resources very conservatively, discipline on costs
- Not raising money just because she could
“There are companies out there that may have failed because they had too much money and never had to think about the economics of their business,” she said in July this year in an article.
In sum, investors can look forward to ownership in a tightly run and disciplined business, led by a highly qualified and mission-driven CEO, who still has a sizable chunk of ownership in the company.
The business has had a demonstrated record of growth and profitability, and proven itself in the extremely challenging conditions prevailing in the US retail sector over the past few years.
Stitch Fix Inc (NASDAQ:SFIX): What to Watch Out For, However
Investors should take note of some of the areas of concern surrounding Stitch Fix.
- The company reported high losses of nearly $600k in 2017. Are margins under pressure?
- Fix boxes are a novelty and customers perhaps do not use the subscription service long-term enough
- The much-hyped technological algorithms that the company uses to “stylize” the customer may not be as good as they are claimed to be
- If the algorithms fail to keep up with changing fashion trends then the company would have to resort to additional marketing, pressuring margins
- The omni-present Amazon is always lurking around the corner and may choose to muscle in with a similar service
Stitch Fix will release its financial results for its first quarter of fiscal year 2018 ended October 28, 2017 after the market close on Tuesday, December 19, 2017, followed by a conference call.
That will provide a more in-depth glimpse of the current performance of the business.
Meanwhile, investors should hold.