Thoughts on SFIX?

I know Tinker’s viewpoint of don’t buy cheap companies, but I find Stitch Fix an interesting company.

Using AI/ML to try to identify what customers will want to buy from a subscription case when you have their past behavior is an interesting case, which they are trying. Knowing how long it takes to tune ML models, I’m waiting to see if they can create a model that brings in increasing revenue for existing customers. Being able to shop from home might be another business model that is given a boost by the current COVID 19 panic.

SFIX is down 30% today, and down 60% from their highs. Their revenue growth was disappointing at 22% . Here is the transcript of earnings call: https://seekingalpha.com/article/4330785-stitch-fix-inc-sfix…

I’ve had them on my watch list for a while - I think I saw a thread on this board of some people who were interested. Anyone have any thoughts on SFIX?

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Hi SteppenWulf, Since you asked about “any thoughts” … here is my personal experience. (I have not looked at their financials at all, since I wouldn’t buy this stock.)

I tried them out when they first launched in 2014 (pre-IPO). From a consumer perspective, it was fun for a few months and the prices were decent. But once I had one mediocre delivery and the novelty wore off, it was very easy to cancel the membership, get my previous month refunded in full, and not look back. I don’t know what their churn rate and acquisition cost per new customer is, but these would be things to really drill into if possible. I imagine in a downturn, this subscription would be first on the list of things a consumer would cancel.

Cheers -
Apt21 …longtime RuleBreakers member, Saul board lurker, and grateful to all the contributors and moderators of this board.

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I sold my SFIX last week and wish I sold last year when Saul and the rest of the board explained why it’s not that good. I think the business idea is great, but great products/businesses don’t always materialize into great stocks.

If I recall correctly, SFIX revenues have been mostly disappointing, showing some accelerations and also some decelerations, and never really growing close to what our SAAS stocks grow at.

As a software engineer who has dabbled in machine learning, I know how amazing and powerful it can be. But I’ve also seen how disappointing it can be, and how a lot of shops like to say machine learning as a cool buzz word to attract employees and investors. At the end of the day, ML is just another tool in the tool box that can’t be applied to all problems with equal success. Perhaps there is a way to use ML to substantially amplify business for a clothing company, but judging by its revenues, SFIX has not figured that out yet.

For previous discussions, see here: https://discussion.fool.com/quick-reminder-of-this-thread-as-sti…

and here:
https://discussion.fool.com/sfix-earnings-beat-32-million-active…

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I have learned so much from this board so I hope this comment helps others. When one of the MF services recommended SFIX several years ago, my initial gut reaction (as a woman) was a hard pass. I do not see how they can achieve sustainable high growth. Clothes shopping can be a chore and a time suck (even when shopping online, as I mostly do), and while I understand the appeal of having a personalized subscription clothing service, I believe the novelty will eventually, uh, “wear off” for enough original or current SFIX customers and then the company will have to keep chasing new ones (and retain them, and/or get them to increase their spending each year). Not to mention that SFIX has to deal with potential supply chain issues, plus compete with other retailers who offer steep discounts at times (like the holidays!). Other companies that have been discussed on this board have far more compelling narratives (and results) than SFIX.

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The US apparel industry is huge. $332 billion a year. So this should give SFIX plenty of room to grow in.

The question really becomes, do people want clothes mailed to them on a scheduled basis? I know everyone will have their opinion on this so it would be easy to have a huge thread of people saying they would or would not sign up for the idea, but that question may answer whether or not SFIX is anything more than a niche, or if they can continue to grow. Even if they master the machine learning part of it down and provide perfect fitting clothes that you truly like, you still have to sign up for the idea of clothes being shipped to you on a regular basis instead of when you need it.

I couldn’t find the figures off hand, but last time I looked at this, the vast majority of SFIX’ customers were female. They said the same thing on their last earnings call. They are now targeting men to grow revenue. Looking at their earnings transcript, the CEO is very light on revealing numbers. She just makes comments such as “To briefly update you on our kids category, we continue to be pleased with this performance.” She did have a few numbers here: "Altogether, our strategy has resulted in men’s revenue quadrupling and gross margins increasing by more than 1,500 basis points from fiscal 2017 to fiscal 2019. "

But I don’t get a sense of this being a real performance driven company when they just give vague descriptions of how the business is doing.

This is what they had to say about lowering guidance:

Now that we’ve seen a few Company-specific but also macro themes play out in Q2 '20, we’re leaning more conservatively in the back half of 2020 and shifting our full year outlook. First, in Q2 '20, we drove healthy active client growth. However, due we think to the heightened promotional activity across retail, those clients spent less with us in their Fixes in the quarter on average, resulting in lower order values than we anticipated. We think it’s responsible to reflect this trend in our second half forecast. Our strategy to continue to grow our assortment of lower price products to serve a broader universe of clients also impacts this guidance.

From what I read into that, the apparel industy has been competitive lately, so their customers have spent less, and they are now trying to go after lower priced customers.

My thought on this is, these subscription based customers should be least likely to be influenced by short term price competitiveness because they signed up for a subscription and aren’t going to start looking for other clothes elsewhere on top of that. So it doesn’t make sense. And are we to assume this heightened promotional activity is going to continue the second half of the year just because it existed in the first half?

She then went on to say this:
On the demand side, what we said in the call, which is that we don’t see any – it hasn’t impacted our results to date. That being said, it would be reasonable to expect that there’s a lot going in the macro world right now. And definitely, the combination of some of the trends that we talked about in the call, in addition to what we’re seeing in the world, really leads us to take a more conservative approach to guidance. And so, I think long term, we’re still super excited for all the reasons that we talked about. We’re really excited about what’s happening in direct buy. We feel that we’re really well positioned I think in a range of potential external outcomes. But we also felt like we need to acknowledge the short-term state of affairs.

She goes from saying heightened promotional activity in retail caused clients to spend less on Fixes. Then in the QA section says demand side has not impacted their results to date.

I don’t have time to continue to investigate this when we’re getting double talk from management. And I tend to avoid companies reducing their forecast. So this is a pass for me as it has been.

SFIX has, from what I’ve seen though, been subject to huge surprises and disappointments in the past though. So I won’t count them out.

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This is an ultra long term stock that is will probably never be right for this board.

I’m in for the long haul because I think they’re building massive infrastructure - warehouses, computer engineers, stylists, apps, algorithms, etc. and this ultimately will be the way people buy clothes. It will take a very long time for retail clothing stores to fail but they will. The SFIX structure is simply much better than building huge, expensive, difficult-to-staff-and-stock retail outlets.

They definitely don’t have the magic bullet/formula yet, but should either be the leader in this space or near the top. And worst case scenario is probably getting bought out.

While the box full of surprise items may not pan out they still may find success with a buy-it-now feature. This is a massive undertaking that will be hard for even the bigboys to fully replicate.

That retailers are offering insane discounts - just to stay alive - and that this is a strong headwind seems credible - just like Blockbuster made ludicrous offers to ward off Netflix. Until that strategy inevitably failed.

On bright side, most articles I’ve read say this is the best of the online clothing services. It just makes sense to put all your info in, have all your tastes and sizes in one place and being sent clothes that fit and match your unique personality. Way better for most than hunting around malls.

Why Styling Services like Stitch Fix and Trunk Club are Worth It
https://www.businessinsider.com/are-styling-services-worth-i…

I also think future generations will be way more likely to share all the info needed to make this service work and prefer to shop online.

FWIW, each time it’s fallen into low teens, it’s given a shot at very nice returns by rising back into the 20’s.

Bottom line: This stock’s story will take a very long time to play out and it will likely never be a stock popular on this board. But I do think it will win as the dominos fall - I can’t see how Nordstrom’s and the like beat off their inevitable decline. They are the Blockbusters of retail clothing. And I say that as a bloke who shops at Nordstroms. As they die off, their customers will turn to online companies like Stitch Fix. Radio Shack fought far longer than any could have imagined. Game Stop as well. It will take even longer for retail clothing chains to fall. And it is highly likely that the data they aggregate has value beyond clothing.

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The reason I have a hard time buying into this company is for every man or woman (mostly men) who doesn’t want to deal with the hassle of shopping in person, there are multiple women for whom shopping is therapy (and even a group exercise) and this company would be taking that way from them.

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This is an ultra long term stock that is will probably never be right for this board.

I’m in for the long haul because…

Not trying to pick on the person who wrote these words, but I think the problem with this sentiment (and I’ve seen MANY Fools that share it) is that you can’t really predict the “long term” except by assessing how a company is doing things each quarter throughout the “short term.”

I want companies with long term trends in their favor. I believe our SaaS companies have them. But they are also producing results each quarter in the short term. If they don’t (TWLO), we cut them loose.

Why would you settle for a company where only the long term story is intact? How is that better than companies attractive for only the short term?

Bear

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Hey Bear - no worries pick away!

Because I believe the odds of a long term victory as retail collapses are overwhelmingly in my favor and I enjoy following the company. Great brand, solid CEO, elite team, big infrastructure in place. I feel like Lake et al are trying to solve a very complex puzzle and are doing it extremely well based on the reviews of the service and fact that company is profitable. I have the top dogg in a space with a huge TAM. My guess is when they get offering right in USA/UK it will be much easier to move it into other countries.

Reward is long term becomes much more highly valued, risk is it gets bought out for not too awful a loss, possibly a gain. Also I have seen - anecdotal I know - many women just rave about it. I also think it has a huge moat in that building up all that infrastructure is not easy.

To be honest, I was expecting a beat and the company to begin taking hold. So as far as short term, I was believing in the short term 24 hours ago. Lastly, it has risen from the mid teens to high 20’s several times and I see no reason to think it won’t again. We’re in the midst of a perfect storm with panic in the air and people battening down hatches. Last thing on anyone’s mind is gussying up.

That said, I cannot argue with the idea that AYX and TTD, for example, are better companies as have lighter business models. And I own generous helpings of each and the other 8 or so that are popular here.

BD

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They are the Blockbusters of retail clothing. And I say that as a bloke who shops at Nordstroms. As they die off, their customers will turn to online companies like Stitch Fix.

I think Blockbusters is a bad example.
Netflix killed them with DVD by mail, primarily…before streaming.
You got the exact same product cheaper and more convenient…but delayed a bit. But you had an automatic queue. You can watch a new movie every week or two…or every day.
Few people buy new clothes that often, forever.

Clothes shopping is all over the map.
Some people like shopping, seeing the clothes, trying them on and immediately taking it home.
Others are the opposite. Others are in-between.
What is the ratio of these groups – don’t know.
Maybe your body in a VR experience is better at some point.
Maybe it is just creepy.

No one liked browsing at Blockbusters and paying late fees and returning the tape/disc.

Mike

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I have the top dogg in a space with a huge TAM…I also think it has a huge moat in that building up all that infrastructure is not easy.

That’s what people say about any low-margin business. (See Wayfair)

Throughout the last few years I’ve realized how much harder it is to succeed without great gross margins. Obviously it can be done…but even Amazon was held back by low margins until it created AWS!

I’d stay away…just looking out for you, BD! But as Tinker would say, each to their own!

Bear

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I just cannot buy the thesis that retain clothiers will collapse. Old Navy appears to be doing quite well and I pick up clothes there at least once a year (including, believe it or not) fashionable mid-weight winter/fall jackets to go along with shorts, casual dress shirts, and even jeans, all at incredibly pricing. I had one girlfriend actually mistake my Old Navy stuff for the expensive stuff from Nordstroms.

I also from time to time go to one of the national discount chains for clothes and furniture. These companies have been on fire, profitable, with rapid revenue growth. I don’t go in there with anything in mind, but just look at what is on the rack the day I am there. I inevitably find a few great things that would have gone for near $100 per at Nordstrom and now at 25-50% of the cost.

In my job I also need to put on the old Kingsman like suit. Have near a dozen. Nordstrom awesome place to go with tailor. There are come to your home tailors. And one can get 3 for 1 suits (that also look awesome) like at Jos A. Bank. Another highly profitable retain clothing chain.

I am not seeing a grave yard of retail clothiers. Perhaps in sporting goods like at Dick’s that has great stuff at great prices during the holidays and clearance sales (Dicks is having some problems). But the others are thriving. Nordstrom is having some issues, but even there they still have more than $500 million per year in profits (even as they are restructuring and adapting).

Perhaps some examples of the dying retail clothier might bolster the claim. I am seeing creative destruction destroying some, and creating retail opportunities for others. I am just not seeing what you are expressing in regard to retailers that sell men’s clothing. Women’s clothing? Ask a woman, I no nothing about that.

Tinker

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“Great brand, solid CEO, elite team,”

So I don’t think they are a great brand at all. Takes quite some time to become a great brand.

Solid CEO? I think she did a great job launching the company and getting it as far as she has, but what interviews I’ve seen, I actually think they need a great CEO to take this to the next level. Lake doesn’t interview well at all.

Elite team? I have no idea, but could you elaborate on this? Elite is pretty special.

Take these three attributes and you would think you would have a company hitting it out of the park right now instead of fouling off balls.

TMB

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Why would you settle for a company where only the long term story is intact?

When the long term potential is very high. Poster child…AMZN. I’m still a 1997 LTBH of AMZN, cost basis $2. Life changing. Also, when a solid business is purchased during highly stressed times, like early '09. Maybe we are headed there again. I was fortunate to have a large cash windfall in January '09, purchased many good companies and still hold them, so again, life changing.

I’ve always been skeptical of determining the future value of any investment, and that the short term says much about the long term results, especially in tech. And I don’t do numbers. It’s worked well for me over the decades. There are some gems covered/discovered here and in 10 or 15 years, one or two or three will be very big winners.

Thanks to all who make this board so interesting. Even though I’m basically LTBH, and have been very successful at it, I still enjoy following the shorter term stuff.

conifer

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When the long term potential is very high. Poster child…AMZN. I’m still a 1997 LTBH of AMZN, cost basis $2. Life changing.

How many hundreds of companies had “potential” but have been long term losers? Also, Amazon has had lots of short term success along the way. You could have done very well owning them not from $2 but from maybe $50 (or whenever the AWS story started to take shape).

Bear

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That’s what people say about any low-margin business. (See Wayfair)

Throughout the last few years I’ve realized how much harder it is to succeed without great gross margins. Obviously it can be done…but even Amazon was held back by low margins until it created AWS!

It depends very much on the turnover. I had a supermarket chain as a client and I was surprised at their huge net profit based on a tiny gross margin. I set out to find out how they did it. The most important job at the supermarket is the chief buyer, a job held by a very nice Jewish gentleman from Barcelona, Spain, a people reputedly more frugal than even Scots! He told me the secret formula: “I have to sell the merchandise three times before I pay for it.” TURNOVER! In other words, if the merchandise lasted a week on the shelves he expected at least 21 days term of payment. BTW, high turnover supermarkets have huge leverage on suppliers that have to make sales quotas. “We’ll help you make your quota on our terms” meaning “low prices and long terms.”

I also interviewed the owner who had inherited the business from his father. One thing he told me was that he got rid of all the slow moving items some of which had been in inventiry for a very long time – dead money not earning its keep!

This supermarket chain converted a 3% gross margin into a 30% return on capital by using other people’s money! One really needs to understand the business model.

Denny Schlesinger

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Very high potential would refer to real game changers, on a society wide level. Is it MDB here that could replace an Oracle and then take it further on how businesses operate? Is it ZM, when homes, businesses and office buildings are all built largely based on and equipped with this type communication (The Jetsons finally)? The iPhone changed how society operates. Amazon has changed how society operates (having a Jeff Bezos is immeasurable). Internet security is certainly ripe for game changing in the future. The Microsofts, Home Depots and Wal Marts of the world have done their part. Allocate some dollars to very high potential and let it sit.

conifer

Hi 12x

Lake made some very positive comments about Men’s last summer.

https://www.fool.com/investing/2019/06/08/5-key-takeaways-fr…

Check out #5.

Karen

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12x, you also need to know that Stitch Fix is NOT a subscription business. Customers get fixes whenever they want. They can CHOOSE to have Fixes sent monthly, every two months, quarterly, or on demand. People do not HAVE to buy the items in their Fixes.

Stitch Fix describes itself as a personalization company. What they are trying to do exceptionally well is understand what customers want and match customers to product for maximum happiness.

Just FYI,
Karen

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Agree with you on it taking a lot to make a great brand. And really, much like the food delivery wars, I’m not sure how much of a moat there is for Stitch Fix or any other similar service.

A woman I know uses Le Tote, which is a very similar service. She wrote about the process in a blog post and then gave an update about 2 years later. If anyone wants to read them, pm me and I can give you the links.

It’s a personal lifestyle blog, so it’s not really about a deep financial dive on the company.

However, it is an interesting opportunity to hear a customer’s perspective on the service. Without getting into financial analysis of the company itself, she does comment on the the ideas we would want to hear from consumers; primarily that the cost is a little bit high but the variety and ease of sending items back and swapping them out helps keep her hooked.

It’s also fascinating to me to see someone who previously had lived a life without a lot of “stuff” begin to accumulate a collection and that two years later, there has been enough success to keep her engaged as a customer. They were clearly able to use their algorithms in conjunction with her choices to keep feeding her clothing that was attractive enough to keep the subscription going and sell the occasional piece.

That all said, I’m not a customer of either. I still harbor questions about what kind of moat there really is when switching costs are virtually nil for the customer.

Below are the quotes I thought relevant from her posts in 2017 and then late 2019.

From the original post…

“Overall Verdict for my first Le Tote month: It’s a fun game to play. I like the options a lot more than Stitch Fix. The tote swap feature means I am not stuck if their algorithm misses big time. The price is still a little high for my tastes. A helpful feature is that you can pause the service at any time – for a week, a month, or whenever you decide to start it back up again. I paused it before I was charged for my next month (today)… but just for a week. #NoSpendNovember*. I’ll be keeping my eye on their clearance sales. Maybe I can scoop up some of this month’s winners for 1/2 price.”

From the post 2 years later…

"Now I’m facing a new dilemma. My growing addiction to dresses is at war with my efforts to live a life free of excess “stuff.” I don’t know how to measure a wardrobe in dresses. How many work-appropriate dresses do I need? What amount allows for a solid rotation? What constitutes a large amount, the number where some get stuck in that “I like it but I never wear it” category?..

I’m currently at 12 Le Tote dresses & 2 of my own work-appropriate finds total. And what about all those dresses I bought for going out dancing 1-2 times a week? What’s the magic number there? TBD."

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