By
with contributions from Adriana Lee
 on October 19, 2017
Katrina Lake

Katrina Lake is taking Stitch Fix to Wall Street with an initial public offering that seeks to capitalize both on the subscription box service’s dramatic growth and retail’s woes.Founded in 2011 by Lake, who is now 34, Stitch Fix is the highest-profile of the subscription box bunch and perhaps the most successful so far. It is the first to pull back the curtain on its inner workings with a filing for an IPO, which lays out the company’s finances and plans in exhaustive detail.Most striking is the company’s growth.As mall traffic has waned and retailers cut back, Stitch Fix grew its active client base from 261,000 in 2014 to 2.2 million in its fiscal 2017 period, ended July 29. (Active clients are defined as people who used the service in the preceding year).The company said the offering would increase its financial flexibility and that net proceeds would be used for general corporate purposes and perhaps to acquire complementary businesses, although the company has no such agreements currently.How much money Stitch Fix will raise in the offering will be determined by how many shares are sold and at what price.In a letter included in the IPO paperwork, Lake said she set out to solve the “very human problem” of finding clothes and simply found a better mouse trap for the $300 billion U.S. apparel market.“Stitch Fix is not better stores, it’s not better e-commerce, it’s a better way,” Lake said. The filing takes a direct swipe at retailers, saying customers view shopping in stores as “impersonal, time-consuming and inconvenient.”“This has led to financial difficulties, bankruptcies and store closures for many major department stores, specialty retailers and retail chains,” the filing said. “For example, Macy’s, one of the largest department stores in the United States, announced in August 2016 its intent to close approximately 100, or 11 percent, of its stores and Michael Kors, a specialty retailer, announced in May 2017 its intent to close at least 100, or 12 percent, of its stores.”Stitch Fix gets close and personal with its customers. The company gathers more than 85 data points from customers when they sign up, including style, size and price preferences, and uses a combination of artificial intelligence and human stylists to send them a box of five looks to try on at home.“Our business is built with the belief that data and technology make us humans better,” Lake said. “Our algorithmic recommendations are a powerful partner to our stylists. Our stylists are freed from rote calculations and tasks and are able to focus on what they are uniquely, extraordinarily good at — creating human connections, being creative, providing valuable context to their choices. This partnership can power more meaningful, more human jobs.”At least for Stitch Fix, it’s an approach that’s led to growth that has far outpaced its retail competitors.Stitch Fix’s net sales grew from $73.2 million in 2014 to $977.1 million last year. Last year alone, revenues expanded by 34 percent. The company logged net incomes of $20.9 million in 2015 and $33.1 million in 2016 and a loss of $594,000 in the most recent year.Adjusted earnings before interest, taxes, depreciation and amortization tallied $60.6 million last year.For a company that raised only $42.5 million, that’s a good turn.Headed into the offering, Baseline Ventures is the company’s largest shareholder with a 28.1 percent stake, followed by Benchmark Capital Partners with 25.6 percent and Lake, who owns 16.6 percent of the company. (The filing also revealed Lake’s compensation, which totaled $9.1 million last year, including a salary of $534,955, options valued at $7.8 million and other compensation of $744,357).Despite its growth, Stitch Fix faces challenges as it stretches out its business model — the company has jumped from women’s to men’s to plus sizes to contemporary, but has no international experience.And while private investors can certainly be demanding, an IPO will put the pressure to continue growing front and center and in the spotlight.The company is already pushing hard and acknowledged in the filing that “to grow our business, we must continue to acquire clients and successfully engage them.”A study commissioned by Stitch Fix said that its “aided brand awareness” among U.S. women ages 21 to 65 with household incomes above $50,000 rose to 41 percent in May from 28 percent in December.Helping push that was an increasing in advertising spending, which rose 182 percent over the past year, to $70.5 million.While Stitch Fix’s business is growing, it’s being fueled by new clients, not more spending by existing clients, at least for now.Clients, for instance, spend more in their first six months using the service than in the following six months, on average.“This is behavior that we expect from our clients and that, we believe, shows both strong elements of our business and the opportunities we have to better serve our clients,” Stitch Fix said.That’s because some people did not find suitable offerings when they first tried the service and Stitch Fix’s mix and now been expanded. The company noted the drop off in spending is also a positive, adding “for some clients, our success in helping them find clothes they love reduces their need for more apparel in subsequent periods.”Blake Morgan, customer experience expert and author of "More Is More,” said: “Customers crave personalized and tailored customer experiences. Stitch Fix successfully scaled personalized interactions across its customer base — meeting an un-met customer need. Stitch Fix stands out among a sea of sameness in retail. Most retail experiences are highly impersonal. The customer walks in and the store has no clue who she is or what her tastes and preferences are. This impersonal approach is still taken by many web sites as well. With its ability to provide one-to-one experiences at scale, Stitch Fix makes customers' lives easier and better.”

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