Stitch Fix’s Success Story Is Underappreciated

(Bloomberg Opinion) -- I can easily tick off a list of data points to show that Stitch Fix Inc., the online service that puts curated boxes of clothing on customers’ doorsteps, is on a tear: It had 2.9 million active customers in the latest quarter, up 22 percent from a year earlier; since shipping its first box in 2011, its annual revenue has exploded to $1.2 billion; and it’s that scarcest of Silicon Valley creature — a young company that is actually turning a profit.

And yet, shares of Stitch Fix have whipsawed since its debut on the public market in late 2017. Wall Street analysts and investors seem to flip-flop between believing this company is the wunderkind future of fashion and fretting that it’s a fleeting novelty along the lines of Gilt Groupe.

Stitch Fix’s Success Story Is Underappreciated

They should quit the hand-wringing. In the last year, Stitch Fix has offered evidence that it’s built to last, and that its ambitious guidelines for 20 percent to 25 percent annual revenue growth in the near future are achievable. And much of that comes down to the smarts and good governance of its founder and CEO, Katrina Lake.

Lake, in some ways, has a familiar-sounding Silicon Valley founder story. She attended Stanford University, held jobs at a consultancy and a venture-capital firm, and ultimately developed the idea for Stitch Fix while attending Harvard Business School. She sent the first Stitch Fix orders from her apartment. Her idea — in which a combination of human stylists and algorithms pick out clothes tailored for individual preferences — hinges on the power of data and technology to improve broken consumer experiences.

But in other ways, Lake, 36, is an anomaly in the world of tech. Her business required inventory to get off the ground, a model that isn’t exactly catnip for venture capitalists. And, in an industry with a notorious diversity problem, she’s a rare woman founder who has managed to take her company public.

Lake’s most potent insight may have been that for shopping to truly be personalized, data analysis couldn’t simply be sprinkled on top of her business. It had to be baked in. “The part of me that loves data knew it could be used to create a better experience with apparel,” Lake wrote in Harvard Business Review in 2018. “After all, fit and taste are just a bunch of attributes: waist, inseam, material, color, weight, durability, and pattern. It’s all just data.”

Stitch Fix’s Success Story Is Underappreciated

Accordingly, Lake set up an unconventional organizational structure: She named a chief algorithm officer, Eric Colson, who reports directly to her, rather than to some other leader within a broader technology unit. Colson, a former Netflix Inc. data scientist, says that was an important decision. “We have our own tooling, our own workflow, our own ways of doing things,” Colson said in a December interview. “If we’re forced to inherit that stuff from a parent department, it’s just not going to thrive.”

Key to these algorithms is customer feedback, such as when shoppers fill out a profile that includes their fit preferences or when they provide details on why they’re returning a certain garment. And the company says it is making strides toward better understanding what its users want. Take its recent Style Shuffle game: It asked customers to rate pictures of clothes, and it’s resulted in more than a billion ratings to feed into the recommendations algorithm. These particular bits of data are powerful, Colson said, because they allow Stitch Fix to isolate a shopper’s preferences on style. When a customer returns clothes from one of their boxes, it may be because they didn’t like the fit, fabric, price — and of course, Stitch Fix tries to learn from those inputs, too. But getting a rich trove of information on style predilections, specifically, could be a lodestar.

So why aren’t more people on Wall Street trying to get a piece of Stitch Fix? I think it’s partly because investors aren’t classifying it correctly. Stitch Fix seems to get lumped in with other online businesses such as Blue Apron Holdings Inc., the deeply troubled meal-kit subscription company, and Trunk Club, the clothes-in-a-box concept on which Nordstrom Inc. was forced to take a massive writedown. With those comparisons in mind, investors might ask: How frequently do people really want new clothes? How long before the thrill is gone?

But think of it this way: No one is obsessively asking Macy’s Inc. or Gap Inc. about how many orders their best customers place a year. No one’s fixated on their “keep rate” — or how many items in an order aren’t returned. It is widely understand that those old-school stores might only see certain customers a few times a year, and that’s just fine. Stitch Fix, too, can have a thriving a la carte business. At its core, the service isn’t about sucking you into a subscription, it’s about being one of the main places you go to buy clothes, at whatever intervals you need them. And if Lake is right that its algorithms and stylists can learn to understand just what you want, it could steal more market share from established chains.

Consider this contrast drawn by Mike Smith, Stitch Fix’s COO, who came to the startup from Walmart Inc.’s online division. The world’s largest retailer, knew “a lot about how many bananas they’d sold, or how many lamps they’d sold,” Smith said in an interview last month. What’s more difficult for the old-school chain is figuring out why a customer made a particular purchase, or why they walked into a store and didn’t buy anything. It’s on these kinds of data points that Stitch Fix aims to build an edge. 

And it matters that Stitch Fix’s gross margin compares favorably to that of many specialty apparel companies.

Stitch Fix’s Success Story Is Underappreciated

The success of Stitch Fix has made Lake a prominent face of female entrepreneurship, and she seems to understand her power to set the tone. Lake is currently on a maternity leave after having her second child, a company spokesperson said. By taking several months off, she’s setting an example for her employees that they, too, don’t have to come back to work after a nanosecond if they have a child. And she’s smart not to make corporate culture an afterthought, given how many Silicon Valley swashbucklers we’ve seen end up hampered by letting their workplaces devolve into toxicity.

When Lake returns from leave, she’ll face plenty of challenges. Stitch Fix has to become better at marketing if it is going to find a bigger audience. I’ve heard anecdotes from shoppers who have received boxes that they said didn’t quite match their style, suggesting the algorithms and stylists still need improvement. And anything less than a smashing debut in the U.K., where Stitch Fix is set to launch soon, could suggest it will have trouble making it overseas. But as much as any tech entrepreneur can, Lake has earned the benefit of the doubt in navigating Stitch Fix’s next phase.

In its latest fiscal year, Stitch Fix's net income was $44.9 million.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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