Why we love Stitch Fix
Updated: Nov 26, 2019
A new fashion-retailing company has emerged. It is aptly called Stitch Fix. And we love it.
Stitch Fix is an online personal styling service. The client gives it's measurements and personal styling preferences, Stitch Fix does the rest:
It will combine data (science) with human stylists' judgement in order to deliver the client a "fix" of apparel, shoes and accessories. Each time a fix is delivered, the client can choose to keep it (and pay) or send it back, easily. With every fix, the system learns and becomes better at personalizing to each client's tastes and preferences.
Stitch Fix optimizes it's data algorithms through machine learning and wizard works of former astrophysicists. This article describes the growing number of astrophysics PhDs leaving universities in order to build recommendation algorithms and data models for the tech industry, some of which work for Stitch Fix.
A good business model that is well-managed often results ultimately in good financial figures, which in turn should lead (in the long term!) to good stock returns. For Stitch Fix, it's financials were:
There is no debt on the balance sheet.
On a first glance, revenue growth is very satisfactory. Profits and free cash flows do not seem to follow this trend in perfect sync, yet we think that the company is well-balancing growth with profitability, which we cannot say of many other public tech companies.
We must remind ourselves, though, that financial statements are always rear-looking. The past might be indicative, but not more than that. We must judge a company's future and value it accordingly. The key components of a company's success are: business model, market & management. On all fronts, we think that Stitch Fix scores high.
We see Stitch Fix as an early leader in a huge market that increasingly moves online. It is so convenient for people to shop at home instead of going to a physical store (after all, why would you? ). But always finding something you like might lead to a long search and disappointment. Stitch Fix' proprietary combination of data algorithms and human stylists appears to be a powerful one to serve their shoppers well. So far, Stitch Fix attracts more customers and these customers increasingly spend their money with Stitch Fix.
Since it's business model is online-based, it can easily be rolled out to other countries worldwide. They have begun rolling out it's offering in the UK since may 2019. In addition, Stitch Fix has been spreading out it's line of products to children (Stitch Fix Kids), oversized customers (Stitch Fix Plus) etc.
The management-team is led by Stitch Fix' founder, Katrina Lake. Combined, management holds half of the total outstanding shares and 89,5% of the total voting power. We invest almost exclusively in founder-led companies. They tend to manage a company for the long term and often shun debt, which makes us sleep well at night.
The company was officially founded in 2011 and went public in 2017. Young companies that only recently IPO'ed are mostly small to midcap's and will often display a large volatility in their stock price.
We will try to benefit from this phenomenon.
Of note is that one of it's founding venture capitalists, Bill Gurley, purchased around 3 million $ worth of stock in the last months at an average price of 21$. Bill Gurley is famous as a former top analyst and now VC expert. He is joined in buying Stitch Fix by another investing giant and one of the all-time best analysts ever: Mike Kwatinetz. He too has often recommended Stitch Fix as a strong buy. Who would we be then to disagree?
We are buying SFIX as the months progress. We believe SFIX's current stock price does not reflect it's intrinsic value. The stock itself has been behaving quite volatile since it's IPO and has been markedly horizontal in recent times:
Disclaimer: The author is Investment Manager with Vladeracken BV, an asset manager licensed by the AFM. Vladeracken invests or has invested on behalf of it's clients in the equities mentioned above. These writings constitute no investment advice. He or she who seeks to invest in the above mentioned securities does so on his/her own risk. The author and Vladeracken can in no way be held responsible or accountable for the contents of the writings above. The mentioned securities are considered to carry a high degree of risk.