Stitch Fix Inc., the online retailer with a unique approach to fashion and data, filed for an IPO which will see the company listed on the NASDAQ. In the company’s SEC filing, it gave a placeholder value of $100 million and lists Goldman Sachs and J.P. Morgan as the lead underwriters.
Stitch is an interesting combination of fashion and tech, and boasts impressive financial numbers including a history of making a profit. Yes, ecommerce retailers have to look at the Amazon (NASDAQ:AMZN) gorilla and figure out how to fight it. But Stitch has a unique approach which should help it survive as shown by its continuing success.
Ecommerce has been well established to be the wave of the future, and investors who missed the Amazon train may have another chance with Stitch. Investors should seriously consider getting in on this stock as soon as possible and at least keep a close eye in the time leading up to its formal debut.
Clothing Data Success
Customers are growing more used to buying clothes online, and the online apparel market is projected to hit over $120 billion in revenue by 2022 compared to $80 billion in 2017 according to Statista. But customers can feel overwhelmed by the choices out there, and the process of returning unfashionable or ill-fitting clothes can be cumbersome.
Stitch by contrast runs on essentially a “subscription box” model where it sends boxes of clothing to its subscribers every month. Nonsubscribers can also use Stitch’s services and order a box, picking and choosing what they like while sending the rest back.
The failure of other online subscription services like Blue Apron Holdings Inc (NYSE:APRN) may cause some investors to get nervous about Stitch’s prospects, but there are key differences. Clothing is a different industry from food. Food subscription services have to compete with local grocery stores which can generally beat them on price, while Stitch can beat retailers like Macy’s on price without too much difficulty.
But perhaps the biggest difference is that Stitch has strongly emphasized the importance of data in getting customers clothes which suit them. As Stitch observes in its filing, “Our data science capabilities consist of our rich data set and our proprietary algorithms, which fuel our business by enhancing the client experience and driving business model efficiencies.”
While many ecommerce companies, such as SCR888, have to infer customer data, Stitch receives data from customers who tell them exactly what styles they prefer and how much they want to spend. Stitch combines data from machines with the human touch of professional stylists, which lets them create personalized fashion styles and gives them a unique niche. This does mean that Stitch has to stay in front of the latest fashion trends.
Growing in the Face of Competition
As a result of its unique approach, Stitch has grown massively over the past years. Revenue has grown from $73 million in the 2014 fiscal year to $977 million in the 12 months ending July 29, 2017. As of July 29, 2017, Stitch also had over 2.1 million consumers.
Massive growth is a good sign, but perhaps the best aspect of Stitch’s success is that it has a good history of profitability. Stitch had a net income of $20 million in 2015 and $33 million in 2016, followed by a net loss of less than $1 million in 2017. Far too many tech IPOs admit that they are uncertain about how their great product can actually make money, but Stitch shows that they know how to grow and be profitable.
However, the growing ecommerce apparel market does mean that Stitch will be facing more competition, most notably Amazon. Amazon recently launched a service called Prime Wardrobe which is similar to Stitch, and the tech giant is already the biggest apparel retailer in America. However, Amazon does not appear to use the stylists which Stitch does, which means that Stitch can still focus on offering a great fit. And Stitch has successfully thrived in the face of Amazon up to this point.
In addition to the threat of Prime Wardrobe, CNBC points out that Stitch is also concerned about its dependency on Amazon Web Services. This is a legitimate concern given that a February AWS outage negatively impacted Stitch’s services, and so the company will have to figure out whether it should stay dependent on a competitor’s technological services.
A Lot to Like
It is still too soon to reach a concrete decision about Stitch, especially as it has not even indicated how much it plans to raise or a price point. But it is hard to say no to a growing tech company with a history of profitability in a market which will continue to expand. Stitch will have to convince investors that it can remain competitive with Amazon during its roadshow, and investors should be willing to give it the benefit of the doubt. Barring any surprises, this should be a profitable company for anyone able to get in on the ground floor.