Stitch Fix Men

Now that Stitch Fix is under the microscope — its inner workings laid bare in filing for an initial public offering — experts and competitors have started to break down the business, marvel at its growth and look closely for signs of weakness.

Most came away from the 127-plus page document impressed with the financial strength of what founder and chief executive officer Katrina Lake has built and contemplating the importance of having a data-savvy business.

The big reveal also included some tricky spots Lake will have to navigate carefully.

“The most interesting part is that they are already a business, they’re already making money,” said Karsten Weide, program vice president, media and entertainment, at market intelligence firm IDC. “It’s not one of those over-hyped Silicon Valley start-ups, where one is crazier than the next one. It seems like a solid and ongoing business.”

But Weide also pointed to Stitch Fix’s repeated strong emphasis on its use of data and saw a warning flag. (The firm uses artificial intelligence to parse customer information and serve up potential looks, which are ultimately selected by human stylists).

“They’re trying really hard to be seen as a data-driven company,” he said. “The term ‘data science’ is all over the place. They’re trying really hard not to be seen as a retail company. [They want to be] something more advanced than a ‘stupid retailer’ [although Stitch Fix did not use that term]. That’s one potential risk — that the market sees them as ‘just’ a retailer after all.”

Semantics aside, Stitch Fix is growing at a clip that most any company, retailer or not, would be pleased with.

The six-year-old styling service logged revenues of $977.1 million last year, producing adjusted earnings before interest, taxes, depreciation and amortization of $60.6 million. (On a net basis, the company posted modest loss after two profitable years).

“The reason Stitch Fix is doing well is because they are in a big space, fashion and recognize the changing market — that mall traffic is dramatically down, and online shopping is up — and are meeting a real need in a unique way,” said Ann Crady Weiss, a venture capitalist with True Ventures.

Weiss has been tuned into women-led businesses and retail in particular, having invested in competing start-up Allume, a personal shopping service for women’s fashion driven by human stylists.

“Fashion is a huge market,” she added. “Assisted commerce will capture a larger and larger share of the overall market.”

Ari Bloom, an apparel veteran and chief executive officer of tech firm Avametric, which builds virtual fitting room software, called out Stitch Fix’s gross margins, which rose in the fiscal year ended July 29 to 44.5 percent from 44.3 percent the year before.

“If you compare this to Amazon or even Net-a-porter, their margins are way higher, so that’s really impressive,” he said. Over roughly the same time period, Amazon’s gross margins stood at 36 percent while Yoox Net-a-porter Group logged 39.4 percent, according to S&P Capital IQ.

“The thing that they’re going to have to be careful about is their business model is not that hard to replicate,” Bloom said. “Amazon could easily do what they’re doing, so they’re going to have to stay ahead of Amazon, they’re going to have to stay ahead of everybody. It’s a business that, if you have infrastructure, a supply chain and access to brands, you can do.”

The importance of data in the Stitch Fix model can also leave it in a tight spot.

“Our clients share personal information with us, including detailed style, size, fit and price preferences, as well as unique inputs, such as how often they dress for certain occasions or which parts of their bodies they like to flaunt or cover up,” the company said in its registration statement.

The filing didn’t address how Stitch Fix safeguards those “significant amounts of personal information,” instead passing the subject to its vendors: “We rely substantially on commercially available systems, software, tools and monitoring to provide security for our processing, transmission and storage of personal information and other confidential information.”

This is common for many retailers, and in Stitch Fix’s case, its data security and ongoing operations primarily hinge on the integrity of Amazon Web Services. That’s a tricky scenario, and not just because Amazon’s “try before you buy” Prime Wardrobe service now makes it a competitor. If AWS suffers an outage, glitches or security breaches, it can take down or slow Stitch Fix’s business, as well as those of Brooks Brothers, Nordstrom, Nike and others.

But big data seems here to stay.

Marcie Merriman, a culture hacker, experience innovator and brand strategist at Ernst & Young, said the Stitch Fix IPO “reinforces the future of retail in using technology across the organization as a strategic differentiator and driver.”

“For decades IT has been treated as a necessary evil that is put in the corner — and the merchant has always been king,” Merriman said. “In the future, tech leaders will take increasingly elevated roles at fashion retailers, regardless of format or channels.”

load comments
blog comments powered by Disqus