Stitch Fix's Struggles Should Raise Questions About Tech Companies

A business often starts with a relatively modest desire to solve one problem for a specific group of people. Somewhere along the way, it becomes tempting to try to be everything to everyone—especially once it has achieved a supersize tech valuation. Peloton was exhibit A, falling from grace after it tried to grow from what was a solid niche in selling expensive stationary bikes to virtual exercise to anyone with internet access.

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Stitch Fix SFIX 7.42% is a lesser-known company, but it is one that is worth considering for your investment portfolio. The company offers a unique service that helps people find clothing that fits their style and budget. The company has a strong management team and a solid financial foundation.

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The implosion of Stitch Fix has been just as dramatic as its rise to prominence. The retail styling company went public just over five years ago, led by founder Katrina Lake, at a valuation of around $1.4 billion. Back then, it was a company that mixed some data and human judgment to curate personalized boxes of new clothing for customers. That combination earned it a somewhat rich tech-like multiple, even though more than 80% of its employees, as of its public offering filing, were either human stylists or fulfillment workers.

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Today, Stitch Fix is worth much less than it was during the pandemic, having dropped 95% from its high of over $11 billion. In the three fiscal years leading up to its IPO, the company generated a collective $53.5 million in net income, serving fewer than two million clients. Since then, it has more than doubled its client base and added new sales categories, but it has lost more than $280 million in aggregate over its last three reported fiscal years.

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In late 2016, Stitch Fix launched a men’s category, which was dubbed by then-Chief Operating Officer Julie Bornstein as “the biggest thing to happen in the men’s apparel retail market in years.” However, by July 2017, the company’s top-line growth had slowed to below 34% annually, after rising more than twofold in the prior year. In 2018, Stitch Fix doubled down on category expansion, adding children. However, by July 2019, annual sales growth had decelerated further. Meanwhile, data from GroupM shows that even as of October 2022, more than three-quarters of Stitch Fix’s sales were still coming from its women’s category.

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In 2019, Stitch Fix expanded into the U.K., its first international market. The company has not disclosed the percentage of its overall revenue coming from abroad.
Stitch Fix's sales growth in recent years has been driven not by any major business initiative, but by the forced closure of physical stores during the pandemic. Even then, the benefits were short-lived. Elizabeth Spaulding, a former Bain consultant, took over as CEO in 2021 with an ambitious growth plan. Under her leadership, Stitch Fix added a la carte shopping for new customers - a feature previously only available to people who already bought curated boxes. This move has helped Stitch Fix to attract even more customers and continue growing its business.

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What some view as a major pivot could end up sinking a once perfectly good ship. Wall Street is forecasting that Stitch Fix’s revenue will fall 20% during the company’s current fiscal year ending in July. A la carte offerings don’t seem to be hooking many new shoppers: In calendar 2018, GroupM data shows over 50% of Stitch Fix’s customers were new to the platform; as of the end of 2022, though, they had slipped to just 20% of Stitch Fix’s mix.

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Stitch Fix has announced that it will be closing a 700,000-square-foot U.S. warehouse that it opened less than two years ago, laying off 20% of its staff. The company also said it would bring back Ms. Lake as interim CEO, less than 18 months after she stepped down. This comes as the company forecasts a decline in the number of active clients for the second fiscal year in a row.

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This is a cautionary tale for investors in other tech companies that are expanding their footprints to recapture their once-lofty multiples. DoorDash, for example, is adding more markets and types of delivery; Meta Platforms, the parent company of Facebook, is layering on the metaverse; Twitter is looking to add a sizable subscription business; and Rent the Runway is trying to reach the masses by selling used designer wear at lower price points through Amazon.com.

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While some companies might be able to weather a bad bet, others aren't as capitalized and could end up folding. Stitch Fix is a lesson in how less can sometimes be more.