Hello BoF Professionals, your exclusive weekly briefing is ready, with members-only analysis and a digest of the week’s top news. Don't forget to download the BoF Professional iPhone app.
Katrina Lake, the chief executive of Stitch Fix, still takes time out of her stacked schedule to style “fixes,” or personalised boxes of five fashion items, selected with a mix of data, algorithms and human touch.
The business press often praise Lake, who launched the personal styling service in 2011 while completing her second year at Harvard Business School, for her outsize ability to use to data to sell clothes. However, the pathway to Stitch Fix’s $120 million initial public offering — registering 8 million shares at $15 per share on the NASDAQ stock exchange at 11am EDT today — was as much about the qualitative as the quantitative.
“When I first started Stitch Fix, I was really thinking about the retail of the future,” Lake tells BoF in her first interview since the company filed to go public in October 2017. “How are people going to buy clothes 15 years from now?”
Today, Lake’s ruminations have attracted nearly 2.2 million active clients, generating $977 million in net revenue, up from $730 million in 2016. Stitch Fix’s net revenue accounts for actual sales from clothes purchased as well as the $20 styling fee attached to each box sent. (If a customer buys something from a box, the fee is deducted from the total bill. If a customer sends all five items back, he or she is still charged the fee.)
The concept is not without its detractors. As the price of acquiring customers rises — and keeping those customers around becomes more difficult — the retailer faces an uphill battle as revenue decelerates and advertising and marketing costs increase. Competition is also increasing. Amazon, for instance, launched Prime Wardrobe, a service that encroaches on Stitch Fix's territory, earlier this year. These may be some of the reasons Stitch Fix priced its IPO below expectations of $18-$20 per share.
In 2016, sales increased 34 percent year-over-year, compared to 113 percent growth in 2015 and 368 percent growth in 2014. The slowdown in growth is to be expected to an extent, given that it’s easier to double sales when there are fewer sales in the first place. However, Stitch Fix says that only half of the women in its target audience even know Stitch Fix exists; with men, that percentage is even smaller.
But while Stitch Fix lost $600,000 in 2017 (compared with a net income of $33.2 million in 2016), the company has achieved positive cash flow from operations since 2014. (Like many start-ups, it has chosen to apply its profits to expansion.) Its trajectory is especially admired because of Lake’s prudence in raising venture capital: just $42.5 million from Silicon Valley venture firms including Lightspeed and Benchmark over the course of six years. Since its launch, the company has expanded into multiple categories beyond women’s clothes — including women’s private-label merchandise, plus sizes, shoes and menswear — and has broadened its assortment to include more upscale offerings by partnering with over 100 contemporary brands, including department store favourites Theory and Grey by Jason Wu.
But beyond the specifics of its model, Stitch Fix’s journey from early stage start-up to public listing in just six years reflects business lessons that many fashion-tech companies, few of which have reached IPO, can use.
BoF spoke exclusively to Katrina Lake to distill the secrets to Stitch Fix’s success and how to get to IPO.
Hire experienced people who complement each other. While Lake’s vision may be driving the business, she also made smart hiring choices at the executive level. Just one year into the founding of Stitch Fix, she recruited former Walmart.com chief executive Mike Smith as chief operating officer and a data science brain from Netflix — Eric Colson — as chief algorithms officer. “They have a lot more operating [experience] and at a much greater scale than I do, and they were hugely instrumental in getting us to where we are today,” Lake says. “They're also going to be hugely instrumental in getting us to the next billion, and all the milestones to come after that.”
Be contrarian in your quest for opportunity. Many fashion brands are shifting their focus to direct sales, cutting out middlemen — like department stores and other multi-brand retailers — in favour of higher margins and more control over customer experience. But Stitch Fix has made the wholesale model work, in part, by treating its vendor partners right and offering better agreement terms than most department stores, taking the hit when products don’t sell and must be offloaded into the off-price channel.
What’s more, because it does not operate a static store online or offline, there is very little indication of what Stitch Fix’s “buy” looks like, which means products can be circulated from customer to customer without feeling stale. Every customer receives her own mini store in the mail every time she orders a box.
My belief is that personalisation is going to drive the market, and it’s going to be core to the way that people shop in the future.
“Yes, we buy at wholesale and we sell at retail, but that’s where the similarities between the old way and the new way ends,” Lake says. “Personalisation is really at the core of that. If you think about stocking a store, it would make no sense to stock a 27-inch inseam in every pair of jeans. By having a model where we are buying the right things for the right people, we can be much more capital efficient.”
Use data to predict the future rather than reflect on the past. Every industry — from medicine to entertainment — is figuring out ways to use big data to solve consumer problems, whether that’s diagnosing a patient or serving up Netflix recommendations.
Stitch Fix’s millions of points of data, culled from qualitative customer feedback and quantitative figures, is impressive. But it’s how Stitch Fix uses that data to deliver the right product at the right time that makes it so valuable. Not only does data help Stitch Fix’s human stylists determine which products to pick from a selection of over 600 brands, but it also helps the company fill in product gaps with its own private-label collections.
For instance, early on, data quickly indicated that women needed cardigans for chilly work offices 365 days of the year. “You can’t rely on the vendor community for something like that because vendors are trying to show newness and trends,” Lake says. “The cardigan was the origin of being able to use data to see opportunities where we need to have a stronger assortment. And it’s still very much true today, especially in men’s and plus size.”
Once you settle on a strategy that works, stick to it. Some analysts have suggested that, in order for Stitch Fix to continue on its growth trajectory, it will need to open some sort of permanent retail presence, either online or offline. While Lake says that the company has no “plans on that front,” she would be open to a more static retail experience if it reflected the Stitch Fix ethos. “The core of our strategy is really around personalisation,” she says. “There may be a place for [permanent retail], but it’s not going to be a store that is just there for a transaction. Ultimately, we want to help find people what they love. Today's e-commerce, having millions of things online for people to read ratings and reviews, that doesn’t feel like a strategy that is cohesive to ours.”
Bring precision and rigour to your business. Stitch Fix has been dubbed the “goldilocks” of fashion. The more “right” the box is, the more items the customer will buy. That drive for precision, Lake says, is Stitch Fix’s greatest asset. (Not only does her team collect millions of data points, but humans touch and review every box. Corners aren’t cut.) “We’re delivering one-to-one personalisation, and we’re doing it in a way that is profitable and sustainable,” she adds. “My belief is that personalisation is going to drive the market, and it’s going to be core to the way that people shop in the future.”
Focus on existing customers as much as new ones. While Stitch Fix may be generating nearly $1 billion a year in sales, brand awareness is still quite low. (According to the company, only half of the women in its target audience even know Stitch Fix exists; with men, that percentage is even smaller.) That means Stitch Fix will continue to work to acquire news customers through paid marketing. However, for Lake, getting customers to return multiple times is the real goal. One of Lake’s own clients is a mother of four, whom she has styled through three pregnancies. “She buys from Stitch Fix all the time, and buys a lot from us. I look at her purchase history and we must have a lot of her share of wallet,” Lake says. “And then I have other clients who are more episodic or come and go more. There are a lot of opportunities for us to be able to address more of each of those client’s clothing needs.”
Don’t take more money than you need. Stitch Fix took a prudent approach to investment, raising just $42.5 million over six years on its path to IPO. “We weren't able to raise money super easily all the time,” Lake says. "When we did, I treated every single dollar from investors very preciously and we were thoughtful about building a healthy, sustainable business early on and being capital efficient.” When the time came to accelerate the next phase of growth by raising more capital, Lake eschewed several routes — including being acquired by a private equity firm or another, larger company — choosing a public flotation instead so that the company could, in some ways, remain autonomous. “This is a company that can and should be a standalone company,” she says. “I think we still have a lot of opportunity for growth.”
THE NEWS IN BRIEF
BUSINESS AND THE ECONOMY
Farfetch's revenue grew 74 percent last year. Sales at the online luxury fashion platform grew from £87 million (about $114 million) in 2015 to £151.3 million (about $198 million) in 2016, according to a filing at Companies House. Gross merchandise value was also up 81 percent, from £302 million ($398 million) to £548 million ($718 million), over the same period. The company, however, is not yet profitable, reporting losses of £34 million ($45 million) in 2016, a 19 percent increase from the year before.
L Brands meets third-quarter profit forecasts. The owner of Victoria's Secret, Bath & Body Works and other chain stores posted revenue of $2.62 billion for the third-quarter ended October 28, beating Wall Street forecasts. Operating income, however, decreased 18 percent to $231.7 million compared to $233.6 million the same period a year earlier.
JD.com posts unexpected quarterly profit. The operator of China's second-biggest online mall reported a surprise net income of 1.01 billion yuan (about $152 million) in the three months ended September, as investment in logistics and new arenas such as fashion attracted shoppers. The result is a boon for the e-commerce company, which is rapidly broadening its portfolio beyond consumer electronics.
Target's holiday-quarter forecast disappoints. The Minneapolis-based retailer issued an underwhelming profit forecast for the key holiday quarter, as it continues to depend on price cuts to drive traffic to its stores and websites. The company is in the midst of a $7 billion overhaul to its business, as it fights to keep pace with retailers like Walmart and Amazon.
Walmart third-quarter sales beat estimates. The world’s biggest retailer delivered better-than-expected sales at its stores in the US, boosted by price cuts, cleaner stores and an aggressive push online. Total revenue increased 4.2 percent to $123.2 billion. The retailer has recorded more than three straight years of comparable sales growth, despite a tough retail environment that has hurt other brick-and-mortar players.
Gap third-quarter earnings top estimates. Comparable sales grew at both Gap's Old Navy discount brand as well as its flagship brand. It marks the first time in 15 quarters that the retailer's namesake brand has posted positive same-store sales. The company also raised its earnings forecast for the year.
Barbie gets a hijab. The first hijab-wearing Barbie doll has been released to honour Ibtihaj Muhammad, the first-ever US Olympic athlete to compete wearing the Islamic headscarf at the 2016 Rio games. The toy manufacturer, which has previously been criticised for making their dolls too thin and overly sexualised, plans to release a range of new figures next year modelled on inspirational women.
Vanity Fair confirms new editor-in-chief. Radhika Jones, the editorial director of the books department at the New York Times, is Condé Nast’s choice to succeed Graydon Carter. In her new role, Jones will oversee all content and consumer experiences for the magazine brand across all platforms, including its new digital vertical The Hive. Her first day will be December 11.
Moncler parts ways with Thom Browne and Giambattista Valli. The Italian luxury outerwear firm will discontinue its Gamme Bleu and Gamme Rouge runway collections after the Spring/Summer 2018 season, thereby parting ways with designers Thom Browne and Giambattista Valli, longtime creative directors of the two sub-labels. A new strategy will be announced in the coming weeks.
J.W. Anderson's CEO steps down. Chief executive officer Simon Whitehouse is exiting after three years at the London-based label, for personal reasons. Whitehouse was appointed as the brand's first-ever chief executive in 2014, just eight months after LVMH took a minority stake in the label. The news follows last week's news of a major executive reshuffle at LVMH. “A new replacement will be announced imminently,” a spokesperson said.
Simon Spurr returns to ready-to-wear. The British designer has been appointed as creative director of Italian menswear brand Eidos. The Yves Saint Laurent and Ralph Lauren veteran launched a namesake line in 2006, but pulled the plug in 2012 after an alleged disagreement with his business partner. His first Autumn/Winter 2018 collection for the Neapolitan label will debut in January.
Poshmark raises $87.5 million, partners with Amazon. Poshmark's series D funding round brings the peer-to-peer marketplace's total funding to $160 million. Chief executive Manish Chandra says the company, which is currently only accessible in the US, will use the new funds to expand and enter new countries. Hoping to make the shopping experience "more immersive," the platform has also launched a voice-enabled styling service with Amazon, linking the Alexa AI tool to its app.
Spotify now sells beauty products. For over a year, Spotify has worked with retailer Merchbar to allow fans to easily purchase merchandise from musicians on their profile pages. The streaming site is now introducing cosmetics for the first time, working with popular makeup artist Pat McGrath and musician Maggie Lindemann. Beauty products from Pat McGrath Labs can be purchased from the pop singer's page, although Spotify is not taking a cut of any of the sales.
Céline launches on WeChat. Following the appointment of a new chief executive, Severine Merle, in April, the luxury brand officially joined Instagram and said it would be launching e-commerce later this year. The brand is now venturing further into the digital space by opening an account on WeChat, China's most influential social media app — signifying its efforts to bolster its presence in China and reach out to a digitally savvy Millennial generation.
Lord & Taylor opens virtual storefront on Walmart.com. The world's largest retailer will start offering high-end clothing and accessories from Lord & Taylor to its customers in spring 2018. The partnership is aimed at boosting Walmart's online assortment of premium products while advancing access to Millennial customers who usually do not shop at Walmart. "This is part of a larger business strategy where we are working to create a new Walmart.com," said Walmart US' head of fashion Denise Incandela.
BoF Professional is your competitive advantage in a fast-changing fashion industry. Missed some BoF Professional exclusive features? Click here to browse the archive.