CASE STYDY STITCH FIX
2023 APRIL QUARTERLY ISSUE
Written by : Andrew Sia
From the Desk of the Publisher
We come across the company who is a subscription service that send the box of clothing together with shoes and accessories. With $20 per month, the customers can keep the items they keep and return those that they don’t desire. The customers would need to pack them back in the box and go to the UPS for instance to ship back but the window time is only two days.
It started as the company mixing some of the customers’ data and put in human judgement and send the box to the customers, who are subscribers, every month something for them to choose. It caught big when people were all working from home during the pandemic which lasted for two years. Now the company is on the crossroad as where they should improve as customers are unsubscribing their services.
All of a sudden these companies who were booming at the pandemic have to reinvent themselves. And we have seen DoorDash trying to add markets where their delivery services are needed; Meta Platforms, parent company of Facebook, is introducing metaverse; Rent the Runway is selling used luxury clothes through Amazon.
It is a piece of business modestly crafted by its founder, Katrina Lake, who was a business school student at Harvard in 2011 and it was being founded during that time. She began with a BA in Economics from Stanford University and moved on for an MBA from Harvard University.
Katrina was known as the youngest woman to take the company public at the time, and the most impressive was that it was one of the few companies who showed a profit upon entering the market.
It started as a company known as retail styling company who went public just five years ago. With its selective products, including clothing, shoes and accessories, that are merchandised and put in a box to send to their customers who then decide what they want to keep and the rest they can return. It is a subscription service in the form of a box that the customers would receive and it was only targeting the women in the beginning.
In late 2016, it launched the men’s category. By July 2017, the company’s top-line growth had slowed to below 34% annually, but in the previous it was growing 200%.
The company went public at the time in 2017 and had a market evaluation of more than $1.6 billion. It was a company who used some data that it collected from its customers and with some human judgement to curate personalized boxes of clothing and send to its customers. This business model earned its recognition as a tech-company as it is using algorithm, although 80% of its employees at the time were stylists or fulfillment workers.
In 2018, it further expanded its category by adding children.
By July 2019, its sales growth had decelerated further, and the market survey was showing that more than three quarter of its sales were still coming from the women’s category.
In 2019, Stitch Fix expanded into the U.K. market.
Today it worth less as it dropped 95% from its pandemic high of over $11 billion. The company’s current market cap is $444.34 million. Its share price peaked in January 2021 at about $96 per share. It is currently down about 79% from a year ago.
As of January 10, 2023 it closed at $4.01 per share.
On December 6, 2022, Stitch Fix announced its financial results for the first quarter of the fiscal year 2023, it shared the following information:
- Net revenue down 22% over year to 455.6 million;
- Active clients dropped to 3,709,000 with 471,000 users opted out of the service last year;
- There was a net loss of $55.9 million.
Elizabeth Spaulding was the CEO of the company since August 2021, but there were so many issues during her time in this position. In the fall of 2021, she launched the Freestyle product to reach a broader market. Instead of offering what Stitch Fix was known for their subscription service in the form of a box that the customers would receive, the Freestyle service allowed the shoppers to choose based on style, fix and budget. Then it changed the practice by limiting to those who had ordered a Freestyle and soon it was struggling to stay in business and continue to bring in revenue.
Many stylists quickly jumped on the concerns over the algorithm was making basic mistake and couldn’t replace the human touch that would need for fashion. And only 39% of the respondents on the site approved her as the CEO, knowing that she has no previous experience in fashion or retail. She stepped down and moved from human stylists to data-based science algorithms.
From the financial results as released by the company for the quarter ending April 30, 2022, it was showing the online fashion business lost 200,000 active clients. Its net loss went up to $78 million from the loss of $18.8 million the previous year. Stitch Fix’s immediate response was to layoff 15% of its salary employees, it was about 330 people.
Spaulding’s stepping down and the plan announced to reduce the workforce in January 5 led the share price to go up 9% but this slight increase doesn’t come close to the loss of the company’s share price dropped 97% in two years.
An internal memo sent out to the employees announcing the impact to those 20% workers:
- At least 12 week of severance pay will be paid, but depending on the employee’s tenure with the company;
- Healthcare support through April 2023 and mental health support until the end of April 2023, this include counseling, legal and financial services;
- Career support to help them to find new roles.
This shows the human side of the company as it is so rare to come up during this time.
In a press release in January, the online personal styling service announced the closure of the 700,000 square feet distribution center in Salt Lake City which it opened in less than two years ago.
Katrina will stay in the position of interim CEO for Stitch Fix for about six months until a replacement can be found.
Stitch Fix, an online shopping brand showed the weariness and failed to adjust its business to the post-pandemic climate. It is not a secret that consumers are shifting their spending habits. During the pandemic many of them were restricted to work from home and they grew into a habit of signing many subscription services, and now they discovered that they had too many of those when things are returning to normalcy.
With these streaming platforms, people increased their subscription spending during the pandemic, but with the soaring inflation and the fear of a pending recession, consumers are now looking to cut back their monthly spending.
It is important for Stitch Fix to cut back its cost, but equally important to see if the company can stay in focus on revenue growth by bringing new customers into its current business model. With active clients dropping 11% year-over-year, the company needs to invest in new business format to attract new customers to increase its revenue.
If we look back, Stitch Fix’s biggest boost to sales growth in recent years didn’t come from its business model but from the lockdown of physical stores during the pandemic. During the time when everyone was working from home and the daily attire was athleisure. But the trend didn’t last too long, and having said that its business shoot up during that period.
Then entered Elizabeth Spaulding, a former Bain consultant who succeeded Katrina Lake as the CEO and she introduced the Freestyle product which we mentioned earlier. This “a la carte” approach reflected her most ambitious growth plan which contradicted with the previous curated boxes of clothes and this didn’t take off.
Also the customers are starting to get bore with the monthly curated boxes of clothes which are repeating themselves. Complains about the quality of the clothing that are not holding. Although it is said that the customers can return those items they don’t keep, and the window for doing the return is very short.
More customers are jumping ship and try to get out from this type of subscription service would make their daily life easier. Going back to the retail stores for shopping is bringing back the lifestyle which everyone enjoys.
All of a sudden, this tech-based business is no longer fun and sexy. This will give Stitch Fix a lot to think about before they can put their business back on track again.