By Evan Clark
with contributions from Adriana Lee
 on November 17, 2017
Stitch Fix Men

Wall Street wasn’t overly kind to Stitch Fix Inc. on its first day.

The buzzy company priced its shares at $15 each in its initial public offering, below the $18 to $20 it had projected.

While investors pushed Stitch Fix shares up as much as 23.5 percent to $18.53 shortly after they hit the market, the burst didn’t last. The stock closed up just 1 percent at $15.15 on the Nasdaq.

That left the company with a market capitalization of $1.46 billion — rich valuation, although not as rich as some expected and, as a public company, Stitch Fix will now be judged continuously on expectations.

The styling service sold 8 million shares, immediately raising $120 million. Underwriters have the option to purchase another 1.2 million shares.

The company is something of a hybrid retail and technology company and thus presents a more nuanced growth story that can be harder for some Wall Street investors to get behind.

There have been concerns that Stitch Fix’s model could be replicated, particularly by Amazon, but founder and chief executive officer Katrina Lake told WWD there’s plenty of room for her now-public company.

“Going public is a choice for us,” Lake said. “It gives us more working capital and flexibility in funding our own growth, and helps us deliver on existing business goals: serving existing clients better, acquiring new clients and expanding our addressable market.

“Amazon is an impressive business and they’re making a large investment in apparel. Given the significant opportunity retail presents — $353 billion with more than 80 percent of product still being sold in stores — there’s room for many players to be successful,” Lake said. “We offer a much different value proposition than Amazon and we believe that our unique combination of data science and human judgement is our competitive moat and I believe that our model offers a much better way for consumers to discover, find and buy clothes that they love.”

Katrina Lake

Katrina Lake  George Chinsee/WWD

The company’s success in building a solid base of profitable customers who came in through an “intro offer” has impressed Jim Fosina, founder and chief executive officer of Fosina Marketing Group, a subscription marketing firm that works with major companies such as Gwynnie Bee, Disney, Hearst and others.

“They began small and understood the value that customers were looking for in terms of design and fashion,” Fosina said. “Most importantly they understood how to retain customers in the model and build ‘lifetime value.’”

Fosina argued Stitch Fix’s strategy is “highly defensible” in the face of retail titans like Amazon.

“Stitch Fix puts great weight on the service component of the business,” he said. “This isn’t a business that is selling clothes off the rack at a price… Amazon focuses on the widest selection of product, solid prices and delivery to home. There are lots of players in that segment, and it’s not high customer touch — basically pick and pack.”

Now, new constituencies that relentlessly look for more — Wall Street investors and analysts — are going to be weighing in on the company, its competitive challenges and its prospects.

From the early performance of the stock, it seems Stitch Fix still has some hearts and minds to win over.

In an interview at Nasdaq’s Time Square offices, chief operating officer Mike Smith said Stitch Fix was “ready to be a public company.”

“We’re not a typical unicorn that took a lot of cash,” Smith said. “We earned our valuation. We’re very financially disciplined.”

Before the IPO, Stitch Fix had raised only $42.5 million.

It used that kitty to establish a company with 2.2 million users, which expanded its revenues by 34 percent last year to $977.1 million. The company’s adjusted earnings before interest, taxes, depreciation and amortization totaled $60.6 million, although on a net basis it posted a modest loss after two profitable years.

Stitch Fix has expanded into men’s, plus sizes and contemporary brands over the past year or so and Smith said it could continue to expand by bringing in new clients, adding product offerings and reach new geographies.

“We feel strongly that we are a growth company,” he said.

And he knows where that growth — at least right now — is coming from.

“When we learn where we’re taking share, its form brick and mortar retailers,” Smith said, singling out department stores and vertically integrated players.

Stitch Fix differentiates itself, in part, with its data-intensive process that uses by artificial intelligence and human stylists to pick looks for users to try on at home.

That gives the company’s customers a more personalized assortment.

It’s a business model that has garnered lots of attention, although it’s not clear that Stitch Fix is what the rest of the market is evolving into as it seeks to cater more to customers as individuals.

But then again Stitch Fix doesn’t plan on sitting still.

“A lot of us come from bigger companies and you see what happens when they get comfortable,” Smith said.

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