Stitch Fix reports a surprise profit and soars 50% — could continue to benefit from two e-commerce trends – The Average Joe
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    Stitch Fix reports a surprise profit and soars 50% — could continue to benefit from two e-commerce trends

    victorlei

    December 10, 2020

    With Stitch Fix, you too can now have your own Ryan Gosling-esque personalized shopper.

    On Dec. 7, Stitch Fix, the company that reinvented the apparel shopping experience, reported earnings that surprised investors and sent its stock soaring nearly 50%.

    • Net revenue of $443.4m — increase of 10% from a year ago.
    • Surprise profit of 9 cents/share — analysts expected a loss of 20 cents/share.

    What operational hell looks like

    Stitch Fix was founded in 2011 by Katrina Lake, the youngest female founder to ever take a company public.

    Stitch Fix isn’t your typical retailer — they send its customers a personalized monthly box of apparel known as the “Fix”. Customers pay for the items they want and send the rest back. Using the data it collects, Stitch Fix recommends items personalized to each customer.

    Stitch Fix’s operations are also more complex than traditional apparel retailers. They buy its inventory from 1,000s of brands and personalize each box before sending it out. Afterward, they’ll receive millions of returns that must be cleaned and sorted for the next month — sounds like an operational nightmare…

    Fashionably Late Growth

    Despite being an e-commerce business, COVID had taken a toll on Stitch Fix’s sales. Shipping delays led to an order backlog and sales drop in the first half of 2020.

    But sales at Stitch Fix had begun to slow prior to COVID, pushing the business to expand its offerings over the past 2 years:

    • Product expansion by letting customers purchase individual items directly beyond the “Fix” and by launching a plus-size and kids offering.
    • Geographical expansion into the UK — Before 2019, Stitch Fix had only delivered to US consumers.

    For investors… Two e-commerce trends

    Despite growing its sales 30%/year in the past 3 years, Stitch Fix’s stock has been relatively flat — dragged down by several challenges:

    • Lower profitability… The complex nature of its operations adds additional costs compared to other e-commerce retailers.
    • Growth potential… Analysts have questioned the demand for subscription-based apparel businesses.
    • The $1.5t gorilla… And of course, there’s Amazon, who announced the launch of a similar service on July 31, 2019.

    But Stitch Fix isn’t a stranger to challenges — Katrina built a profitable business worth over $5b despite early naysayers (professors and investors) telling her the difficulties and challenges in her business model.

    If Stitch Fix can overcome its challenges, the company can benefit from two trends — the growth of online retail and personalized online experience.

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