Buying SFIX

Don’t they have significantly declining growth rates which have dropped into the modest range? If so, I don’t see how they could be a fit for this forum.

No, their growth rate isn’t significantly declining. Revenue growth was 33.8% in 2017, dipping to 25.5% in 2018, then projected to accelerate again to 28.6% this year.

I’m not excited about SFIX as an investment since I don’t see a sustainable advantage. And it seems cheap at an enterprise value of about 1.1 times this year’s revenues but other mature clothing retailers seem to be priced at about 0.5-.0.7 times revenues, much cheaper than software companies.

I could be wrong about SFIX. It seems like a well run innovative company.

dave

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What is interesting about Stitch Fix is that their customer growth slowed, but their average revenue per customer increased, and that is what has been driving revenue growth, moreso than new customer acquisition.

Stitch Fix chose to focus on existing customers before new customers, and has delayed some ad spend so they would not run into inventory issues for either their existing or new customers.

As far as advantages, Stitch Fix is matching customers with clothing and they have the data to do so. Here is an article in Wired that covers some of their tech:

https://www.wired.com/story/stitch-fix-shop-your-looks/

I can also say that their customer service is top-notch. Stitch Fix describes itself as a personalization company, and they work on relationships with their customers through the human stylists. The algorithms assist in many areas, like sizing and matching items to customers based on what similar customers have purchased, but the people part of the business drives customer engagement.

Karen

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Karen…
I bought SFIX,as soon as it was mentioned on MOTLEY FOOL STOCK ADVISOR. It did go up very much.Have not checked lately.
Better?
STJ

Hi STJ,

Stitch Fix has been a volatile stock.

https://www.google.com/search?q=stitch+fix+stock+chart&r…

I am expecting strong results on October 1, which may give the stock a boost. I also own shares and consider it a long term position.

Karen

Also, here is a good article about Stitch Fix vs. Amazon Prime Stylist. I have tried both services as well (Prime Stylist only once). I prefer Stitch Fix, as this author does. Amazon does not acheive the personal touch in the same way that Stitch Fix does.

I tried Personal Shopper and experienced several frustrations and glitches along the way that ultimately made it difficult for me enjoy the service — even though I did manage to score two new skirts and a blouse in the process.

Here’s what it was like using the new Amazon service and why I don’t plan on using it again in the future:

https://www.businessinsider.com/amazon-stitch-fix-like-perso…

The other intriguing piece for me about Stitch Fix is its smaller cap size vs. total addressable market. Stitch Fix is worth $2 billion. They absolutely have room to grow.

Check out their June investor presentation:
https://investors.stitchfix.com/static-files/ec8ba972-9fde-4…

As more apparel dollars come online, Stitch Fix plans to grab more of those online dollars.

Karen

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I took a quick look at Stitch Fix. If the long term model on the slideshow Karen linked to is to be believed, roughly 10% gross margin on a roughly $1.7b run rate would be something like 170m in annual profit. A PE ratio of 25 would mean SFIX should be worth $4 billion, rather than $2 billion where it sits today. And with the rate they’re growing, you could even see a higher PE.

Conversely, a 5% net margin and a PE of 10 would make them a $850 million company.

Obviously there’s a lot of upside, but I think the market is pricing in that risk. Achieving a 10% net margin doesn’t seem outlandish, but it’s not a given. I’d imagine even if they achieve it, there’s some risk of margin erosion over time. People don’t want to pay more than they used to…but payroll and inventory etc…those costs aren’t fixed. So even as they scale, maintaining a nice gross margin won’t be easy. My guess is, that will keep the PE ratio down.

In the short term, the market doubts their margins, so what if the market’s right? What if they come out with 40% growth this quarter, but only 1 or 2 cents EPS instead of the 4 or 5 expected. How would the market react?

Switching back to the long term, what if SFIX flounders to ever become profitable? I don’t think it’s likely, but they’re not a software company, and so margins are not a given. I’m pretty sure their gross margin is actually very good for the industry…which leads to questions about whether it’s sustainable. I know it’s growing now, but how/why it’s so high is worth exploring.

I think I can see both sides here. Schrodinger’s cat is still in the box. With a solid quarter, it’s possible the market could see that they’re growing nicely, doing what they say they’ll do, and the shares could get a good bump up. Or the market might not favor them until they actually show the profit – whenever that is. If I had to guess, I think it’s the latter. I don’t think the market will suddenly send the stock soaring just because they show slightly better revenue growth.

But, if they beat on revenue AND beat big on EPS, I could certainly see a big bump up when they report.

So thanks Wouter for bringing this. I liked it enough to make an options bet. But in the end, I see it as a bet, rather than a company that’s a screaming buy.

Bear

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Switching back to the long term, what if SFIX flounders to ever become profitable?

Stitch Fix is already profitable, unlike many of the software companies that we follow here.

Or the market might not favor them until they actually show the profit – whenever that is.

Here is a link to their June 6 10-Q. I am not the most familiar with reading these, though.

https://investors.stitchfix.com/node/7826/html

Karen

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I took a quick look at Stitch Fix. If the long term model on the slideshow Karen linked to is to be believed, roughly 10% gross margin on a roughly $1.7b run rate would be something like 170m in annual profit. A PE ratio of 25 would mean SFIX should be worth $4 billion, rather than $2 billion where it sits today. And with the rate they’re growing, you could even see a higher PE.

10-Q: For the Nine Months Ended April 27, 2019


Revenue, net         1,145,409
Cost of goods sold     632,644
  Gross profit         512,765

Gross margin 44.8%


Net income attributable to common stockholders    29,681

Net margin 2.6%

https://secfilings.nasdaq.com/filingFrameset.asp?FilingID=13…

For retail I’d go with “Dress for Less” Ross Stores (ROST) but I’m out of retail now. Net margin 10.7%

https://secfilings.nasdaq.com/filingFrameset.asp?FilingID=13…

Who needs such a crazy rollercoaster?

http://softwaretimes.com/pics/sfix-09-15-2019.gif

Denny Schlesinger

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Other things to consider:

– Stitch Fix sells a lot of its clothing at full price. This is different from bricks and mortar retailers who have to do a lot of discounting to move inventory. If a customer keeps 5/5 items, they get a 25% discount.

– Stitch Fix uses customer data and customer feedback to inform its inventory buys. Because it knows customer sizes, preferences, etc., it can better predict what is going to sell, and to whom it will sell, in advance. This helps them keep the inventory tight and moving quickly. Stitch Fix also uses its data to help its vendors make their clothing better for customers. Recent partnerships with designers Katie Sturino and Rebecca Minkoff have highlighted how Stitch Fix helps designers understand and serve customers better. Stitch Fix is an innovator in bringing more designers into the plus-size market, which has been underserved.

– Stitch Fix uses algorithms throughout its business. Check out their Multithreaded blog to get a feel for how deep their tech is. They are not just a box company sending out things haphazardly.
https://multithreaded.stitchfix.com/blog/
Eric Colson, who was a Netflix data guy, is now the emeritus Stitch Fix data guy. There is a little bit of tech in this business:
https://www.linkedin.com/in/ecolson

(If anyone here is on the Fool premium boards, come and play over at our Stitch Fix board!) -K

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Thanks for all the discussion. I agree with mekong that SFIX revenue growth (34-37% revenue guidance) and gross margins of 45% are comparable to some other companies discussed on the board, but they have the disadvantage of managing inventory. As such, we will never see EV/Sales ratios like CRWD, ZM and other software names discussed here. But SFIX trades as an EV/Sales of around 1 and has traded well above a 2 EV/Sales ratio.

Karen’s posts on the SFIX premium boards have been very helpful in convincing me to invest. It’s good to see that customers enjoy the service and get first hand accounts of the improvements they keep making to the service. They are refining their process thanks to their data and constant experimenting. With their user growth and entering new markets, their data advantage is only going to grow and allow them to continue to better target customers and increase the average spend per customer (an increasing metric with avg users spending 7.7% more YoY).

Switching back to the long term, what if SFIX flounders to ever become profitable? I don’t think it’s likely, but they’re not a software company, and so margins are not a given. I’m pretty sure their gross margin is actually very good for the industry…which leads to questions about whether it’s sustainable. I know it’s growing now, but how/why it’s so high is worth exploring.

SFIX has been focused on growth and has been investing aggressively to expand into new markets. With the recent launch in the UK, it incurred startup and marketing costs and even so, they were profitable (7 cents EPS) and cash flow positive. And unlike most software companies discussed here the 7 cents EPS is after taking out stock based comp. If you remove one time launch costs and SBC, the earnings would look even better. You’ll notice that over the last year their gross margins have improved from 43.6% to 45.1%. Part of the reason for the increase is their use of Exclusive Brands (EB), SFIX’s clothing line. This is similar to Amazon seeing which of their 3rd party products sell best and then making it themselves and cutting out the middleman. EB will allow SFIX to continue to improve their margins. Their data/experience will also allow them to continue to become more efficient and reduce costs as a percent of revenue. However, SFIX is going after a huge opportunity and therefore is not overly focused on profit. The US and UK online apparel, footwear and accessories market is expected to go from $93B today to $178B in 2023. There may be concerns about buying clothing online, which is why the vast majority is still bought in stores where they can be tried on. People are getting more comfortable buying clothing online, but with SFIX’s data they can better fit their clothing to their specific customers. Competitors that do not have this wealth of data will struggle with fit as customers have different body types and most clothing will not fit the same regardless of the size. This is a key differentiator (as Karen pointed out on the premium boards). Not only is this massive opportunity with the US and UK market close to doubling in the next 4 years, but SFIX has a significant advantage for one of the bigger roadblock to buying clothes online.

I think I can see both sides here. Schrodinger’s cat is still in the box. With a solid quarter, it’s possible the market could see that they’re growing nicely, doing what they say they’ll do, and the shares could get a good bump up. Or the market might not favor them until they actually show the profit – whenever that is. If I had to guess, I think it’s the latter. I don’t think the market will suddenly send the stock soaring just because they show slightly better revenue growth.

Although SFIX will remain profitable, their focus is not profit maximization in the short term. Their focus should be on growing revenue. This is what they have been doing as you can see in the sequential revenue growth from 23.1% in Q1 to a projected 34-37% for Q4. This has come at the expense of profitability as their SGA went from 40.6% of revenue in the prior year to 46.2% of revenue in the latest quarter. I think analysts recognize this as there were several price target increases after the last earnings announcement based on the higher revenue growth despite reduced profitability.

But, if they beat on revenue AND beat big on EPS, I could certainly see a big bump up when they report.

As I mentioned above, I think the focus is on revenue growth although management did guide for improvement in EBITDA. I do agree that we could see a big bump in the stock after they report on 10/1. During each of their last two earnings announcements, the stock ran up over 20%. This was when the stock was trading at higher valuations and reported less revenue growth. As I mentioned before, I think the market is too concerned about Amazon, so if they guide for good revenue growth, I expect the stock to pop.

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Hi Denny,

So the reason why an investor would choose a Stitch Fix vs. a Ross Dress for Less is that Stitch Fix is clearly the disruptor.

I expect Stitch Fix to take a bite out of Nordstrom and Macy’s every quarter as they move forward, to steal their customers, and to transform them into online shopping addicts.

Ross may be a perfectly fine model, but it is not changing how people shop. With Stitch Fix you are potentially getting in on the new dawn of personalized online shopping.

Karen

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Ross may be a perfectly fine model, but it is not changing how people shop.

Granted but Ross has a rather unique shopping model that is working and which is outstripping most retailers. If it ain’t broken, don’t fix it.

As an investor I care more about the money I make than about “the new dawn of personalized online shopping.” :innocent:

ROST vs. JWN, M, SFIX: http://softwaretimes.com/pics/rost-09-15-2019.gif

Ross Stores has a rather peculiar shopping model, it’s kind of an Easter Egg Hunt, see what you can find today that has been Amazon proof. Also, their off-price merchandise is aimed at lower income levels that possibly have no credit cards to shop online.

With Stitch Fix you are potentially getting in on the new dawn of personalized online shopping.

The best time to get in is once the business model has proven itself, around the time the “S” curve is putting in the bottom uptrend curve. Before that it’s too much of crap shot.

Denny Schlesinger

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More videos (aka Karen is avoiding house chores)

Kris, aka, Lady with parrot
https://www.youtube.com/watch?v=nX7HykAMBQU
This is her second box, she kept a dress (1 of 5)

Her first box, for holiday (aka vacation) was a 5 of 5! YEAH!
https://www.youtube.com/watch?v=FvoIRYXi3WY

Muttonstyle – This lady has got an audience and over 1,200 views
https://www.youtube.com/watch?v=SFo5Q6U9IUk
She is adorable and kept 3 of 5 items.
I really like it when I see people reacting to the clothes and they discover that they like an item and their face lights up. With the red bow blouse, she says – I didn’t know I would like this, and I really like it, and I would never have pulled it off the rack.

Jo C - she has over 1,000 views as well. This is her first box.
https://www.youtube.com/watch?v=M39bMnCjFCc
She is paticular, but said she felt the stylist did a good job for not having much info. She was happy with the stylist, and two items are maybes, no commitments made. This Youtuber lived in the US and had has US Fixes, and she prefers the UK fixes and notes that they are all UK brands. She also talks about Brexit and how it is going to be more expensive to get non-UK brands after it.

This is all I can stand to watch! You’re on your own if you want to dig up more UK review videos!!

Karen

P.S. I like the UK Youtubers better than the American Youtubers. More fun to see inside their homes and listen to their accents.

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The best time to get in is once the business model has proven itself, around the time the “S” curve is putting in the bottom uptrend curve. Before that it’s too much of crap shot.

I think this is coming in October! But I could be wrong! :slight_smile:

Karen

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Shoot, I posted the UK Videos on the wrong thread – thought I was on my SFIX board. -K

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Interesting sales pitch!

Denny Schlesinger

I ordered 3 pairs of shorts from Amazon recently. I had a $50 Amazon gift card, so balance due was only $12. That’s my kind of price. They are fine and fit great.

I hold a few shares of Stitch Fix, but odds are good I’ll never be a member. I’m not a fashion person.

Fool on,

mazske

Active clients were up 17% to 3.1m last quarter [that’s a lot of shoppers] and revenue per client also grew 8% to $467 which accelerated for the 4th straight Q.

I took profits on SFIX on the runup but will probably buy it ahead of earnings.

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I know we don’t focus a lot on the stock price when our focus should be on the business, but I went through the stock price history and found the following:

On June 5, 2018 it hit a low of 18.22
On September 18 it hit a high of 52.44 - up 188% in less than 4 months
On December 24 it hit a low of 16.05 - down 69% in a little over 3 months
On March 12, 2019 it hit a high of 37.72 - up 134% in a little less than 3 months
On May 20 it hit a low of 22 - down 42% in a little over 2 months
On July 1 it hit a high of 32.34 - up 47% in more than 1 month
Today it hit a low of 17.70 - down 45% in less than 3 months

Based only on the stock price, one might assume that the business has swung wildly during this time, but here is what actually happened:

On March 18, 2018, they reported revenue of $295.9M an increase of 24.4% year over year
On June 7, 2018, they reported revenue of $316.7M an increase of 29.2% year over year
On October 1, 2018, they reported revenue of $318.3M an increase of 23.2% year over year
On December 10, 2018, they reported revenue of $366.7M an increase of 23.9% year over year
On March 11, 2019, they reported revenue of $370.3M an increase of 25.1% year over year
On June 5, 2019, they reported revenue of $408.9M an increase of 29.1% year over year
As part of the June 5 release, they guided for revenue growth of 34-37% year over year for this quarter

Looks like steady revenue growth in the 20% range and now we have accelerated revenue growth for the past 3 consecutive quarters and projected into this coming quarter. If I was looking at the stock price of 18, I would assume that revenue growth was slowing. If I was looking at the business results, I would assume the stock price would be near the 52 week high. Both of these are trending in the opposite direction. This is quite unusual when you have the business performance and revenue growth hitting a high point while the stock is nearing a low point. For me this looks like a good time to buy. I bought more call options today and look forward to the earnings on October 1.

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A pretty compelling case, Wouter, thanks for posting.