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Should Nordstrom Acquire Stitch Fix?

Posted on Tuesday, Mar 20th 2018

Billion Dollar Unicorn club member Stitch Fix (Nasdaq: SFIX) went public in November last year. It had a choppy start to the listing as its unique business model puzzled the analysts. Stitch Fix operates a hybrid model of subscription and transaction revenue services. Customers subscribe to receive a supply of apparel that Stitch Fix’s stylists and algorithms work out as best suited to the customer’s needs. But the customer does not have to pay a monthly subscription to receive the package. Instead, they pay a fee when the Fix is sent, and, if they want to buy the products in the package, they can apply this subscription fee as credit toward those purchases. In the last few months, the company appears to have instilled some confidence into the market as it has delivered an upbeat quarterly performance.

Stitch Fix’s Financials

Stitch Fix’s second quarter revenues grew 24% to $295.9 million, ahead of the analyst estimates of $291.54 million. Adjusted net income of $0.07 a share was also better than the estimate of $0.06 for the quarter.

Among operating metrics, it now has 2.5 million clients, recording a 31% growth over the year. Over the quarter, it added 112,000 customers compared with 50,000 estimated by the markets. It recorded an addition of 588,000 customers over the previous year.

For the current quarter, the company forecast revenues of $300-$310 million, ahead of the market’s forecast of $301 million. It expects to end the year with revenues of $1.19-$1.22 billion, topping the Street’s estimate of $1.2 billion.

Stitch Fix’s Expansion

During the quarter, Stitch Fix continued to expand its line of offerings. Within the existing categories, it added to its activewear selection by entering into partnerships with Beyond Yoga and Sweaty Betty. It is also working on a pilot program with Nike for spring. Within regular apparel, Stitch Fix expanded its relationships with other brands including Calvin Klein, Levi’s, and Tommy Hilfiger.

To deliver higher customer satisfaction, it began the use of algorithmic repurchasing tools that help buyers reorder more popular items. It has found that the data-driven repurchasing strategy has improved client satisfaction across multiple categories.

Some of the other initiatives launched by the company include a service called Style Pass. The Style Pass allows unlimited fixes for an annual fee of $49. Normally, Stitch Fix would charge a subscriber a styling fee of $20 for each fix. Both kinds of fee are credited toward any purchases. The Style Pass is expected to drive higher client engagement and average revenue per client.

The second additional service launched recently is Extras. Extras allows customers to buy essential items like underwear, socks, and bras directly without a styling experience. It believes that the category will help it serve more of its clients and drive higher revenue. Unlike the traditional fix, Extras is more closely aligned to a traditional retail model by allowing customers to make their own choices before the package arrives.

Questions for Stitch Fix’s Board

I believe that Stitch Fix has a strong market opportunity, given that the US apparel, footwear, and accessories market is estimated to grow from $353 billion in 2017 to $421 billion by 2021. But the market, and the subscription economy, has invited a lot of competition. Stitch Fix believes that its model of integrating the learnings from data-driven models with personal stylists has helped it deliver products that customers really want. But that shouldn’t be too difficult for big brands such as Amazon to replicate. How is Stitch Fix planning to address this competition?

I would also like to know more about Stitch Fix’s demographics. It must have a trove of data on its clientele and the choices those customers are making. But to make more sense out of its financial performance, a deeper insight into that data is required. Analysts would feel much more comfortable with more visibility into purchase behavior and demographic data.

Its stock is trading at $20.89 with a market capitalization of $2 billion. It had fallen to a low of $14.48 soon after listing in November last year. It had climbed to $30.07 in December last year. During the last week though, the stock has fallen a bit primarily due to the expiry of the lock-in period. It is expected that the expiry will result in an additional 38 million more shares on the exchange.

Lastly, Nordstrom must be losing a lot of sleep over Amazon’s rising clout in fashion retail. Nordstrom comes from a culture of high touch, personalized customer service. The notion of personal shoppers was first brought to the masses by Nordstrom. Earlier, it used to be the domain of Betty Halbreich’s personal lounge at Bergdorf Goodman where Mrs. Schwab and her likes shopped. Betty, by the way, was the first ever personal shopper in the fashion industry. I got to know her when I recruited her to join the advisory board of Uuma, my third company.

I have long had the vision of a personalised Nordstrom. I want my store — my personal store — that carries merchandise that applies to me; that suits my hair colour, eye colour, skin tone, body shape, and personal style. I want it to stock my favourite designers and more like those. And I want to see articles and community discussions that are specific to my interests.

I start from the notion of context and propose that all the contextual elements are made available within the same site or web service. That includes content, community, commerce, vertical search, and personalization. [Read more in this interview I gave years back to The Business of Fashion on my vision for online fashion.]

And it was by speaking with Nordstrom personal shoppers that, in 1999, I came up with the concepts that led me to Uuma.

It is not that Stitch Fix is doing all this. However, it is doing some level of personalization, and a whole lot more than anyone else.

Stitch Fix can do a lot more. Nordstrom can do a whole lot more. Together, perhaps, they can give Amazon a credible fight. Nordstrom is currently trading at a market capitalization of $8.2 billion. It last reported revenues of $14.8 billion and a net income of $354 million. It ended fiscal 2017 with a cash and short term investment position of just over $1 billion.

 

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