Stitch Fix Files For IPO

SAN FRANCISCO, United States — Stitch Fix, the personal styling service that uses a mix of data, algorithms and human touch to send customers boxes of "handpicked" fashion items, has filed an S-1 form with the US Securities and Exchange Commission with the intention of going forward with a public flotation. The company has set a target to raise $100 million, although that's often a placeholder figure and may be replaced in forthcoming filings.

The initial public offering (IPO) will be underwritten by banks including Goldman Sachs and J.P. Morgan, along with Barclays, Piper Jaffray, RBC Capital Markets and William Blair. If it's successful, Stitch Fix will trade on the NASDAQ stock exchange as SFIX.

In its fiscal year ending July 29, 2017, Stitch Fix generated $977.1 million in net revenue, up 33.8 percent from $730.3 million in 2016 and 113 percent from $342.8 million in 2015. While the company reported a net loss of $600,000 in 2017 (compared with net income of $33.2 million in 2016), adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) in 2017 was $60.6 million, down from $72.6 million the year before.

At the end of fiscal 2017, Stitch Fix had nearly 2.2 million active clients, up about 30 percent from 1.7 million the prior year. It also reported a “repeat rate” — defined in the filing as the percentage of sales from clients who have previously ordered a box from the company— of 86 percent, up from 83 percent in 2016. Stitch Fix does not offer data on return rates, or the percentage of items returned instead of purchased every time a customer receives a new box.

It will likely use funds raised to accelerate the growth of the business through paid customer acquisition, international expansion and category expansion.

Founded in 2011 by chief executive (and Harvard Business School alumna) Katrina Lake, Stitch Fix aims to take the guesswork out of shopping by using 85 "meaningful" data points — including style, size, fit and price preferences — as well as qualitative data to serve up items it predicts the customer will actually want to buy. For the customer, there is surprise and delight in receiving a box of five pieces curated especially for her. "We have so much control," Lake told BoF in 2016. "We understand so much about our product and our customers. When we say that something is going to have a 50 percent chance of being kept, it is [actually] a 50 percent chance. And that's really about the accuracy and relevancy of the data."

Stitch Fix's success is fairly remarkable, given the relatively small amount of money it has raised from equity capital: just $42.5 million from Silicon Valley venture firms including Lightspeed and Benchmark. Venture capitalist Bill Gurley, a partner at Benchmark, has been particularly vocal in his support of Stitch Fix and Lake's shrewd approach. (In contrast, flash sales site Gilt Groupe, launched by two other Harvard Business School graduates in 2007, raised $280 million in funding and sold to Hudson's Bay Company in 2016 for just $250 million.)

The company is often viewed as a sort of apparel-industry savior, not only because it's supplanting the decrease in retail jobs by hiring more than 3,000 "stylists" as W-2 employees — meaning that Stitch Fix deducts payroll taxes from each pay check and offers benefits like 401K and health insurance to those who work a certain number of hours a week — but also by emerging as one of the largest wholesale partners in the US. As department stores shrink their orders, Stitch Fix has come to the rescue, often offering better terms than competitors. While department stores often implore brands to buy back product that doesn't sell after being discounted, Stitch Fix  takes the hit instead, offloading product that doesn't sell into the off-price market through a third-party bidder.

It's no surprise, then, that Stitch Fix recently added more than 100 contemporary brands — including department store staples like Theory, Kate Spade and Rebecca Minkoff —  into its mix, offering a wider range of price points and options to its growing customer base. (The company has also expanded into maternity, men's, shoes and plus-size wares.) About 20 percent of Stitch Fix's revenue — or about $195 million — comes from its private-label merchandise, although it says it does not have "specific targets for merchandise mix" and expects that mix will fluctuate over time.

Stitch Fix does not participate in the traditional markdown cycle, but it does offer certain promotions. (For instance, customers who buy all five items in a box receive 25 percent off the entire order.) Besides keeping return rates in check,  its biggest challenge going forward will be customer acquisition. "We believe that much of the growth in our client base during our first five years was originated from referrals, organic word of mouth and other methods of discovery, as our marketing efforts and expenditures were relatively limited," the company said in the filing. "Recently, we increased our paid marketing initiatives and intend to continue to do so.....Our marketing initiatives may become increasingly expensive and generating a meaningful return on those initiatives may be difficult."

Category and regional expansion will likely be a part of this strategy — childrenswear is a clear opportunity — although it seems that developing a brick-and-mortar presence is not in the immediate plans. The company makes no mention of it in the filing, and physical retail has not been successful in the past for businesses that play in the same field. (Subscription beauty box Birchbox, for instance, has not managed to translate its online experience offline in a meaningful way. While it continues to operate a brick-and-mortar store in New York, plans to roll out several more stores were suspended in 2016.)

If Stitch Fix believes its data is what sets it apart, it will need to continue to hone that data, fending off competitors like Amazon, which launched a similar concept — called Prime Wardrobe — in June 2017. (Perhaps it's no coincidence that news of Stitch Fix's subsequent IPO emerged just a month later.)  If Stitch Fix continues to offer a superior product, the hope is that growth will continue along as well.

While Lake and Stitch Fix's early investors and employees are likely to earn a profit from a public flotation, it seems some have already benefited from the company's early success. Former chief operating officer Julie Bornstein, who officially exited the company in October 2017, earned nearly $2.2 million this year, including an annual salary of $471,955 and $1.7 million from the sale of shares and also severance following her termination. Lake's overall compensation amounted to more than $9 million, although over $7.8 million of that was in option awards, which means their actual economic value will not be determined until the company goes public. Paul Yee, the company's chief financial officer, owns $4.8 million in option awards.

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