SFIX - Stitch Fix

[SHDL]

Thanks for the info.  Did the Fix include brands that your wife wasn't previously aware of?

 

My fixes did introduce me to a new brand, which was great for me.  But now that I know my fit in that brand, I buy directly from the brand's DTC website.

 

I’d say yes, in fact she wasn’t aware of any of the brands except Calvin Klein. 

 

The interesting thing is (as I briefly touched upon in the post above) none of the items they sent us were available for direct purchase from the brands’ websites.  For example one of the items she really loved was a pair of office appropriate dress pants from Kut From The Kloth.  But then when I visit their website all they have are casual items like denims and cords. 

 

So I totally buy ajc’s hypothesis above (very informative post as always BTW) that the items they sent us were actually Stitch Fix exclusives despite their (non-private) branding.  And if so, they are making the right move IMO because by doing so they are creating a way to avoid direct price competitions with the brands’ DTC websites.

[KJP]

Thanks for the info.  Did the Fix include brands that your wife wasn't previously aware of?

 

My fixes did introduce me to a new brand, which was great for me.  But now that I know my fit in that brand, I buy directly from the brand's DTC website.

 

I’d say yes, in fact she wasn’t aware of any of the brands except Calvin Klein. 

 

The interesting thing is (as I briefly touched upon in the post above) none of the items they sent us were available for direct purchase from the brands’ websites.  For example one of the items she really loved was a pair of office appropriate dress pants from Kut From The Kloth.  But then when I visit their website all they have are casual items like denims and cords. 

 

So I totally buy ajc’s hypothesis above (very informative post as always BTW) that the items they sent us were actually Stitch Fix exclusives despite their (non-private) branding.  And if so, they are making the right move IMO because by doing so they are creating a way to avoid direct price competitions with the brands’ DTC websites.

 

Interesting.  The item may be a Stitch Fix exclusive for now, but if it's successful how long will that last?  In other words, if a product is really a hit on Stitch Fix, why won't the brand eventually add it to their regular lineup that's available at other retailers or DTC? 

 

Switching gears, you can see why brands really like Stitch Fix.  Kut From The Kloth just got a new (full price!) customer.  What was its acquisition cost for that customer?

[SHDL]

Interesting.  The item may be a Stitch Fix exclusive for now, but if it's successful how long will that last?  In other words, if a product is really a hit on Stitch Fix, why won't the brand eventually add it to their regular lineup that's available at other retailers or DTC? 

 

That’s a valid concern for sure.  If Stitch Fix is playing their cards right, they probably either (a) have contracts in place that prevent the brands from selling competing products elsewhere, and/or (b) are scattering their orders across multiple brands so that no one else really knows how big of a hit each design is.  More generally I think Stitch Fix has good leverage in its relationship with the brands, and the key question really is how well are they using it. 

 

Longer term, I think they will make their private brands a much bigger piece of the pie.  And when that happens this will likely be less of a concern.

[SHDL]

Also one more thing:  If, for example, Stitch Fix knows that a certain style is very well received by a small but profitable group of customers, they can order just enough items to fill that niche and send them out in a targeted fashion.  The brands involved on the other hand are in no position to make such decisions/moves given their lack of data, and that is unlikely to change any time soon.

[Spekulatius]

Very good exchange above. I don’t own this and it doesn’t really fit what I am looking for, but I agree this is an interesting business to look at. I suspect the most important comment may be this one:

 

And most importantly:  My wife was pretty happy about the experience and wants to place another order.

[Guest ajc]

 

 

Also one more thing:  If, for example, Stitch Fix knows that a certain style is very well received by a small but profitable group of customers, they can order just enough items to fill that niche and send them out in a targeted fashion.  The brands involved on the other hand are in no position to make such decisions/moves given their lack of data, and that is unlikely to change any time soon.

 

 

 

That's right. Your previous points too. Investors might wanna keep a few other things in mind as well:

 

- Of the retailers that were founded in the millennial era, Stitch Fix is the most popular (see image below). Why mess up your relationship with a retailer that could be one of the biggest US channels in a decade?

 

- Stitch Fix sells 1000's of brands. Market share for brands differs between mass market (eg. Nike, the biggest player, has less than 3% global apparel market share) and luxury (I've seen numbers where certain companies own 15%+ of the market). Given Stitch Fix's positioning and total number of brands, I'd say it's unlikely that any one brand counts for much more than 5% of their sales. In other words, unless you're some truly indispensable brand (if that exists), all that'll happen if you go off the reservation is that Stitch Fix will go to a few other comparable brands that use them as a channel and offer their product insights to those businesses. In the following year, Stitch Fix will still be able to sell that same unique, new product they know clients will love, except it'll have Ralph Lauren on instead of that other top brand that decided to overplay their hand.

 

- Connected to that, of the apparel retailers that have significant market share among millennials, Stitch Fix is the only one that doesn't discount. What brands get from this is higher margins and increased cache given that discounting is a sign of brand weakness. Essentially, Stitch Fix is the best general millennial apparel retailer for helping both brand margins and image. Probably not something you want to screw with.

 

- Also, because Stitch Fix refuses to discount, it's the perfect place (or at least one of the few) where brands can expand into even more luxurious and expensive offerings than they usually do. Especially since the personalization aspect Stitch Fix provides gives brands a good reason to actually charge that little bit more. Why destroy your relationship with one of the few, major channels which might allow you to more easily move higher up the brand value stack over the next decade?

 

- Finally, fashion changes annually. You might think you're smart for taking advantage of Stitch Fix this year, but next year when you've been cut out and they shared their data and insights with everyone else, you won't know exactly what to design but every other brand on Stitch Fix will. As the great philosopher DJ Khaled once said, 'congratulations... you played yourself'.

 

There are a few things more, but mostly it comes down to the fact that Stitch Fix is already 3 years (if not 5, which I think is more probable) ahead of everyone else in terms of understanding personal preferences, fit, design, and so on. Same goes for their ability to see emerging trends in the data and the industry on all those aspects. To take the example of where KJP went to shop, those people have no idea why he liked what he bought. Was it mostly the design? The fit? Something else? They're basically flying blind using the old retail and design model and that's true in how they relate to all their customers. Stitch Fix on the other hand knows exactly that you bought it because you loved the fit though you though they could've done this and that with the design. That info then gets passed on to the company for next years range. Imagine giving up that crystal ball even though all your 1000+ competitors have decided to retain it?

 

One last-ish point. Stitch Fix is significantly ahead in all this right now. A little like how SkyBox Imaging (which Google bought) allowed them to see traffic flow patterns, new construction, etc, globally. Wall Street firms were successfully using that tech to count cars in Walmart parking lots and predict quarterly SSS, bets were being made on grain harvests from aerial imaging, and new construction activity gave real time insights into the Chinese economy. Now compare that to some street camera or person on the road side counting cars in order to optimize traffic in a single city. That's kind of where the traditional industry is now versus Stitch Fix's SkyBox type business. Maybe I've dramatized it a little for effect, but it's not a million miles off.

 

The question to ask is what does the average customer expect ten years from now and where does the value lie in the fashion industry? My thinking is that a decade from now, the wealthy (and even just the well-off) are going to expect personalized clothing. The idea that you need to try on 50 items to keep one is an anachronism. In an age of technology, data, and personalization, it's frankly fucking ridiculous that a clothing manufacturer can't make something specifically for me and my tastes. That might sound a little crazy if you're just buying cheap stuff, but if you're spending a few hundred bucks an item then you won't feel the same. And that's where it starts in fashion, at the top. So first, it'll likely become standard with expensive fashion goods that are fully personalized (see the 3D printed Adidas sneakers shaped to your feet - https://www.arch2o.com/adidas-3d-printed-shoes-customised-for-each-individuals-feet/), and after a while as the tech becomes cheaper it'll likely be done as standard across the industry.

 

Before you get to that point though, I think it needs to be asked what the interim looks like for the industry and I think it looks a lot like Stitch Fix. They're the ones with all the data across every item and style type, they see the industry from a birds-eye view, they offer brands full-pricing and far more personalized design ability. I think Stitch Fix also offers the vast majority of brands something they won't have for a long, long time. There are big brands with the resources to build their own version of Stitch Fix and cut them out (though whether most of them actually have the ability to integrate that kind of a data-centred, tech-heavy approach is questionable), but I think for the majority of smaller brands that don't have $100's of millions to spend on building out their own platform, Stitch Fix really is their best option for advancing into this new, personalized age of apparel and because there are so many of them and Stitch Fix is far and away the leader in this area, it is Stitch Fix that has most of the leverage as the industry evolves and not the average fashion brand which could potentially be discarded since there's another 1000+ waiting.

 

Of course, that'll all change one day as the next generation comes up with their own set of innovations and at that stage Stitch Fix will have to watch their backs, but for now I think it's reasonably safe to say that Stitch Fix is in fact the one doing all the innovation and envelope pushing and for almost all brands in that space it's a hard argument to make that they should sit on the sidelines and miss all of the brand, margin, and design progress, that Stitch Fix almost uniquely offers out of the bigger, general apparel retailers. Bottom line... for 999 out of 1000 brands, fucking with Stitch Fix will hurt the brand's optionality more than it'll hurt Stitch Fix's.

 

 

[cameronfen]

Does Stitch Fix allow people to search for an article of clothing and buy it?  Or do you just have to order a fix and hope for the best? I feel like not having that option or not emphasizing it is leaving money on the table.

[SHDL]

Does Stitch Fix allow people to search for an article of clothing and buy it? 

 

They don't, but I think they will at some point - as you say, they're likely leaving money on the table by not doing so.

 

That being said, they already do allow you to enter virtually arbitrary requests like "please get me a black skirt for work" or "I want a pastel colored dress for an upcoming cocktail party - and btw I'm 4 months pregnant" when you order a Fix, so in that sense a search functionality is sort of there.  In fact, as long as it works well (i.e., people actually get what they want), that might actually be a better form of search vs something like Google or Amazon.

[cameronfen]

Does Stitch Fix allow people to search for an article of clothing and buy it? 

 

They don't, but I think they will at some point - as you say, they're likely leaving money on the table by not doing so.

 

That being said, they already do allow you to enter virtually arbitrary requests like "please get me a black skirt for work" or "I want a pastel colored dress for an upcoming cocktail party - and btw I'm 4 months pregnant" when you order a Fix, so in that sense a search functionality is sort of there.  In fact, as long as it works well (i.e., people actually get what they want), that might actually be a better form of search vs something like the Google or Amazon.

 

The one argument against offering an online mall is it may cannibalize buying regular fixes.  From the perspective of a company selling fixes is great because even if my algorithm tells me you like A more than B and I have extra inventory of B, I can send you B without you knowing you could have gotten A.  But again I feel like that is a small price to pay for additional revenue. 

[Guest ajc]

 

 

Does Stitch Fix allow people to search for an article of clothing and buy it?  Or do you just have to order a fix and hope for the best? I feel like not having that option or not emphasizing it is leaving money on the table.

 

 

 

Very good question. I tried thinking it through a short while back.

 

See minute 5 in this discussion (

) for the philosophical answer. It's a good interview (Lake is very intelligent and upfront about her limitations). Worth listening to for the various Stitch Fix-related insights too (see 30mins in and the Q&A at the end).

 

More practically, I think it's an inventory issue. Stitch Fix differs from most retailers in that its data and accuracy allows it to be much tighter at managing inventory than everyone else. Also unlike most, it owns its inventory. Allowing consumers to choose would ultimately hand inventory decisions and control over to the clients, instead of keeping them in the hands of Stitch Fix.

 

Another way to look at this issue conceptually though, is whether ten/twenty years from now most people will be looking for songs on Spotify or videos on YouTube via search, or whether the AI will be so good that it predicts your preferences so near-perfectly that you just essentially go with the flow instead of always locating your own favorites?

 

Not to say a regular search function makes no sense in the future, but I can also sort of imagine a time where AI knows your tastes so well it just keeps on recommending great, unexpected stuff. Remember, we're in the first inning of personalization so there's still lots of improvement needed for the system to work exactly right. However, for those who play video games where you toggle through character clothing/uniform styles, you can kind of see a future where Stitch Fix just sends awesome, well-fitting outfits, and you throw them on before taking on the world.

 

It sounds a little crazy, but the future often does. I remember 20 years ago when we had the crappiest dial-up modems and basic computers that used MS-DOS. It's so archaic looking back. Today, some of the stuff you can do with your phone is just light years ahead of where we were two decades ago, and oh yeah... it can fit in your pocket. The changes that happen over ten and twenty year time frames really can be somewhat incredible.

 

(Also if you want to go on a slight binge, I think the following two interviews are some of her best for getting a deeper idea about the company:

-

and,

-

)

 

 

 

[cameronfen]

Thinking about the question about why no regular retail portal some more, if you have a portal, this encourages price shopping on multiple sites.  When you get a fix, the endowment effect kicks in even if you do look at other products that you could have bought from other portals.  Additionally not having a portal also has an advantage so competitors dont know what you offer (especially what you offer that is unique and protects your AI insights for your brands).  I would hope they at least A/B tested this or something to some extent. 

[Guest ajc]

 

 

Thinking about the question about why no regular retail portal some more, if you have a portal, this encourages price shopping on multiple sites.  When you get a fix, the endowment effect kicks in even if you do look at other products that you could have bought from other portals.  Additionally not having a portal also has an advantage so competitors dont know what you offer (especially what you offer that is unique and protects your AI insights for your brands).  I would hope they at least A/B tested this or something to some extent.

 

 

 

Great points. I especially like the second one and how it stops competitors from getting any idea of their full offering.

 

There are two other aspects which might be worth adding to the endowment effect:

 

- The only other instances where people receive mystery gifts, tend to be for events like birthdays, Xmas, and so on. Happy occasions and important ones. I can't be 100% on this, but I imagine that since youth a lot of us are wired to respond very positively and strongly to that kind of thing.

 

- The second aspect is the way in which their current model means you get your own personal stylist. I've read of a number of situations where clients develop extremely good relationships with their stylists, but I think even those who don't, might feel more of a human bond with Stitch Fix than other retailers as a result.

 

I think those two aspects both assist with retention since they give Stitch Fix time, first because of the initial surprise and unexpectedness, and later because of the bond formed with your stylist, to find the exact right mix for you.

They also segue well into one another, since once the initial fun and mystery starts to wear off, the relationship begins to deepen and more trust and bonding is in place.

 

My guess is the combination of all that results in some relatively valuable incentives.

 

 

 

[Gregmal]

So as part of my research, I tried placing an order with them.  Here’s how it went in case anyone’s interested:

 

I first had my wife create an account with them.  They made her answer a very long list of questions about her physical appearance (height, weight, other measurements, age, …) and preferences (which body parts she wants to (de-)emphasize, personal colors, favorite brands, preferred price range, …). 

 

Then I had her place an order, with a note attached telling them pretty much exactly what type of item she wanted (blouse, sweater, …) and for what occasion (work, casual, …), along with a few other special notes/requests (how conservative the office environment is, fabric quality, …).

 

It took over 2 weeks for the items to arrive.

 

The items that arrived were all of good quality and fit perfectly, and all special requests were honored.  Out of the 5 items that arrived, 2 were excellent picks (much better than what was expected), 1 was shall we say “adventurous” (a bold design that she had never tried before), and 2 didn’t work in terms of color/style and were sent back.  They asked for detailed feedback on each item as part of the check out process.

 

In total, she spent about $220 total on 3 items. 

 

I tried to do a price comparison online but that wasn’t really possible because the exact same products were nowhere to be found (including those from very well-known brands, interestingly).  But my very rough guess is that she probably could have bought comparable items for about $150 elsewhere. 

 

So was this a good deal?  For one thing it was certainly a nice time saver — it probably would have taken her at least a few hours searching around and trying things on to get the items she got from another seller.  Our personal circumstances are such that spending $70 or so to save those several hours is worthwhile, but of course not everyone will feel the same way.  Also, return shipping is really easy for us because we live in a building where we can just leave the package with the front desk concierge, but I think it’s a much bigger hassle for many other people. 

 

And most importantly:  My wife was pretty happy about the experience and wants to place another order.

 

Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.

[Guest ajc]

 

Great, quick read about the various, detailed ways in which Stitch Fix is uniquely positioned to help brands save on production costs and expand into products they hadn't previously considered.

 

This also likely allows brands and Stitch Fix to charge a premium given that they're located more towards the indispensable side of the spectrum.

Brands get super accurate and holistic client insights, while clients get fits and designs that feel intuitively better on every score.

 

https://fashionista.com/2019/02/stitch-fix-plus-size-data

 

 

 

[SHDL]

Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.

 

It’d be funny if they received similar items/service because Stitch Fix somehow figured out that we are communicating on CoBF.  Super creepy, but you never know these days…

[Gregmal]

Its interesting, my wife just tried this as well and had more or less the same experience you described. To a T. More fittingly, she spent all night on the site and has already decided to order more.

 

It’d be funny if they received similar items/service because Stitch Fix somehow figured out that we are communicating on CoBF.  Super creepy, but you never know these days…

 

Yea IDK. I never like to go buy something just because of a good experience, but the reaction from my wife(a boring accountant type, of course said and meant in the most positive but descriptively helpful way in terms of communicating) really kind of opened my eyes to the stickiness of this. Its almost a compounding effect once the user realizes the more they use the product the better the service algorithm understands them. Then they can't wait for their next order. And hey! If I dont like it, I can just return it. This is a very, very unique company. I have no position yet but am currently conducting due diligence and like that the share price seems to be lagging in hopes of me harvesting other winners and allocating before take off!

[Guest ajc]

 

Fast Company recently wrote a long read on Stitch Fix (https://www.fastcompany.com/90298900/stitch-fix-most-innovative-companies-2019), after they included them in their 2019 'Most Innovative Companies' list.

 

The piece was quite positive (as you'd expect), but not unbalanced. It included a number of specific, nuanced insights into how Stitch Fix creates tangible value for both clients and labels.

The article also describes some smart new things Stitch Fix have done to increase accuracy and client retention.

 

 

 

[cameronfen]

So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

 

However I recently came across

this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/

and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat. 

[Jurgis]

So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

 

However I recently came across

this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/

and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat.

 

I'd think SFIX might have a moat in the intersection of their data, customers, and manufacturers. I.e. using data for matching, but also for both customer and manufacturer suggestions/feedback/planning/pricing/models/etc.

 

In some sense the scale is still a moat.

 

If these AI clothing startups can figure out how to efficiently procure clothes to match their AI suggestions, then perhaps SFIX won't have much lead apart of the first mover advantage.

 

Edit: the real disruptor would be AI suggestions + make-clothes-on-demand--fast-and-cheap. That would kill pretty much whole industry.  8)

[cameronfen]

So I'm long the stock, but I might pare down my position.  Namely the main reason I was long was because in addition to the GARPy nature of the stock, the fact that they have data on millions of transactions, which creates a virtuous flywheel and moat in terms of AI. 

 

However I recently came across

this article: www.forbes.com/sites/brookerobertsislam/2019/02/28/artificial-intelligence-software-outperforms-human-stylists-at-fashion-week/amp/

and the startup here used data scraped of Instagram etc to train their AI.  I dont know the quality of their data, but it seems like it's quite easy to get the amount of data sfix has at there fingertips by just scrapping it off Instagram, which puts a serious dent in their moat.  There seem to be quite a few fashion ai startups doing this sort of thing.  I'm curious what other people think about this in terms of the moat.

 

I'd think SFIX might have a moat in the intersection of their data, customers, and manufacturers. I.e. using data for matching, but also for both customer and manufacturer suggestions/feedback/planning/pricing/models/etc.

 

In some sense the scale is still a moat.

 

If these AI clothing startups can figure out how to efficiently procure clothes to match their AI suggestions, then perhaps SFIX won't have much lead apart of the first mover advantage.

 

Edit: the real disruptor would be AI suggestions + make-clothes-on-demand--fast-and-cheap. That would kill pretty much whole industry.  8)

 

That's probably true, that they are an aggregation of middleman, styling and distributor and provide value by aggregating these fragmented businesses, but I don't think that provides an advantage over any other subscription or retail store.  I wonder are they large enough so they dont get into the same dynamic as meal subscription services where they are forced to acquire customers at a low LTV/CAC ratio because otherwise they will not get funding.  SFIX, has a similar dynamic as they are in a low margin business, but I assumed the AI styling would fend off competitors.  But I think other companies like rockets of awesome and kidbox are moving into the space and seem unfazed at SFIX advantage. 

 

At the same time I'm sure there are startups that are trying to do your last comment (ai clothes design), and think this could be done relatively easily for a startup. 

[SHDL]

I don’t see this company as a clear threat, at least for now.  They’ve essentially figured out a way to automate part of what human stylists do at Stitch Fix - coordinate clothing items so that they go well together aesthetically - and built a B2B business out of it.  Furthermore, the key idea is so obvious that I’d be surprised if Stitch Fix were not doing something similar internally.  Also, scraping photos off of Instagram is something anyone can do, whereas replicating Stitch Fix’s database is not so easy.

 

That’s not to say that Stitch Fix is competition-proof or anything, but this company doesn’t seem too scary.

[cameronfen]

I don’t see this company as a clear threat, at least for now.  They’ve essentially figured out a way to automate part of what human stylists do at Stitch Fix - coordinate clothing items so that they go well together aesthetically - and built a B2B business out of it.  Furthermore, the key idea is so obvious that I’d be surprised if Stitch Fix were not doing something similar internally.  Also, scraping photos off of Instagram is something anyone can do, whereas replicating Stitch Fix’s database is not so easy.

 

That’s not to say that Stitch Fix is competition-proof or anything, but this company doesn’t seem too scary.

 

I guess my point is I dont see any reason why stitch fixes database could train an algorithm any better than this publically availible data, if Sfix augmented there data with Instagram that gives them an advantage, but how much, it could be quite small and opens the door to competitors.  This company is not the only one doing these things which is why it worries me. 

[SHDL]

Good question. The way I see it is that the value proposition with Stitch Fix is that I can tell them to get me, say, a sport jacket that I can wear to a concert at Carnegie Hall along with a dress shirt and a pair of shoes that go well with them — and then they send me some items that work well for me without taking any more of my time.  And that is something that these guys won’t be able to deliver given the data they have (assuming it’s just a collection of Instagram photos), regardless of how good their AI algorithms are. 

[cameronfen]

right that makes sense.  So the moat here is that they have your history.  Hmm I'll have to think about that if I think that can deter other entrants. 

[SHDL]

Right, competition is the key risk factor to keep in mind if you’re long. 

 

One good thing about the company is that they have a business model where product quality (i.e., how good the styling service is) improves with usage (i.e., how many people use the service and provide feedback), which means they have a shot at establishing a dominant position where they’re really hard to compete against because their product works so much better than what others can offer.  That’s why I think there’s great potential here. 

 

But of course the wrinkle here is the lack of certainty as to whether they manage to realize their full potential.  The most bullish view I guess is that they’re already so far ahead of the competition that no one can catch them.  A bearish view would be that someone else will soon come in with a similar but superior product and crush them.  It’s also possible that they end up being part of an oligopoly where there are several dominant and successful players.  I guess you just have to make a judgement call as to the likelihood of each outcome and invest accordingly.