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  • 08.02.17

Here’s Why Stitch Fix’s IPO Is The Tech Exit You Should Actually Care About

In a market ruled by substandard IPOs like Snap and Blue Apron, Stitch Fix’s public offering might seem like an unlikely bet. But don’t count it out.

Here’s Why Stitch Fix’s IPO Is The Tech Exit You Should Actually Care About
[Photo: Flickr user shaireproductions]

Last Friday, we learned that e-commerce startup Stitch Fix has reportedly confidentially filed for an IPO. With CEO Katrina Lake at the helm, Stitch Fix’s public offering will be the rare female-led exit, and a significant one at that: The company is seeking a valuation of $3 billion to $4 billion in what could be one of the biggest e-commerce IPOs since Etsy went public two years ago.

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But 2017 has seen its share of lackluster IPOs, namely Snap and Blue Apron, so the news that Stitch Fix wants to go public might have you scratching your head. The five-year-old company’s shtick is to send users a personalized box each month—a “Fix,” if you will—filled with five items of clothing, shoes, or accessories that they can either return or keep. The boxes are curated by way of both algorithms—Stitch Fix has a formidable data team—and human stylists. Customers are charged a styling fee of $20 for each box, which goes toward their purchases if they choose to keep any of the items; they get 25% off if they opt to buy the entire box.

Of course, subscription e-commerce is a crowded market. Stitch Fix counts among its competitors Rent the Runway, Le Tote, and MM.LaFleur, though each has a slightly different model or clientele. A service like Stitch Fix offers more flexibility, allowing its customers to schedule boxes as frequently or infrequently as they would like, which means they’re not locked into a month-to-month subscription.

A major problem for many companies with a subscription model, however, is customer retention, which in turns affects their revenue forecasts. (Stitch Fix has never shared customer numbers, likely for this reason. When reached for comment, a Stitch Fix spokeswoman told Fast Company, “We don’t comment publicly on financing matters and we don’t share client or Fix metrics.”) With the looming threat of Amazon—which recently launched its own try-on clothing service, Prime Wardrobe—and the underwhelming performance of Snap and Blue Apron, you might wonder whether Stitch Fix stands a chance as a public company.

We think it does, and here’s why.

Run, don’t walk! Hands up if you’ve got a Fix on the way that you can’t wait to open. ????

A post shared by Stitch Fix (@stitchfix) on

It’s Great At Data

Stitch Fix may be an e-commerce outfit (see what we did there?), but it has solid data on its customers’ preferences, along with a team that knows what to do with it. Human stylists pick out the items that go into a Fix, but they lean on data that Stitch Fix aggregates through an array of algorithms that can, say, match products to customers or figure out how Stitch Fix should update its inventory. One algorithm reportedly even analyzes a customer’s Pinterest activity to appraise their styling preferences.

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Stitch Fix’s data team is led by chief algorithms officer Eric Colson, who was previously the VP of data science and engineering at Netflix. A team of more than 80 data scientists isn’t what you might expect from a company like Stitch Fix: More than half the team has PhDs from a variety of disciplines, including astrophysics and computational neuroscience. Stitch Fix claims that 80% of people who try the service get another box within 90 days.

Stitch Fix’s data can only get better as its customer base expands. For years, the startup exclusively catered to women; then, last September, Stitch Fix expanded to include men’s clothing as well. In February this year, the company introduced plus sizes, partnering with a number of brands that had previously not even offered plus sizes. And according to Recode, Stitch Fix is particularly popular in parts of middle America where women might have fewer retailers available to them.

It’s Actually Profitable

For a private company, part of the appeal of an IPO is getting more cash. You might imagine the same is true for Stitch Fix, and perhaps it is: Stitch Fix hasn’t scored new funding since 2014, when it received $25 million. (In total, Stitch Fix has about $42 million in capital.) But unlike other companies that go public, Stitch Fix has been profitable in terms of net income since 2015. In 2016, Stitch Fix earned $730 million in revenue.

Since Stitch Fix’s fiscal year ends in July, Recode notes that one reason the company may have filed when it did is because its projected revenue for this year is $1 billion or higher. Until last month, the SEC only allowed companies with revenue under $1 billion in their most recent fiscal year to confidentially file for an IPO.

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It Might Have An Edge Over Amazon

As I said earlier, Stitch Fix isn’t the only subscription box clothing startup in the ring. Le Tote and Rent the Runway are primarily rental services, but both give customers the option of purchasing items; MM.LaFleur offers a similar service, but at a steeper price point and with a focus on work clothes. And then there’s Amazon’s Prime Wardrobe, which now allows customers to pick clothes and try them out free of charge.

But what is most attractive about Stitch Fix and companies in that vein is that you don’t have to wade through the endless scroll of online retailers. Prime Wardrobe lets you try on clothes without buying them, sure, but it doesn’t curate the box for you. With that in mind, Stitch Fix overshadows its competition in terms of revenue: MM.LaFleur reportedly earned $30 million in revenue during 2016, while Rent the Runway brought in $100 million.

Even otherwise, Stitch Fix is up there with Amazon when it comes to online clothing retailers dominating the market. According to market research firm NPD Group, both companies rank among the top 10 most popular retailers for online clothing purchases. And that’s true among the millennial set as well: e-commerce research firm Slice Intelligence reports that Stitch Fix is the eighth most popular online retailer for millennials, with Amazon leading the charge. Stitch Fix might just be able to hold its own in a market puppeteered by the Amazonian powers that be—at least for the time being.

About the author

Pavithra Mohan is an assistant editor for Fast Company Digital. Her writing has previously been featured in Gizmodo and Popular Science magazine.

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