Passing on Stitch Fix @ $447m

TL;DR

- Why I started LBAB! 

- Stitch Fix needs to pick a lane + accelerate, or they’ll die.

- How to get Your Amazon $$ back.

🧠 The Takeaways

Stitch Fix has the cash to weather the storm, but it’s going to be a hurricane to get to profitability.

1. Stitch Fix can’t be the Stylist for everyone. They need to pick a lane.

2. Subscription for Fashion never made sense. They need to optimize for AOV.

3. When you make more money investing than operating a biz. 🚨

+ Why I started LBAB!

LBAB Community -  Why I started LBAB!

The reason why I started this newsletter and post the content I do isn't to beat up on DTC bizs or pick on anybody.

It's because amazing brand founders (like a lot of you) saw a decade of headlines about massive rounds and big names gobbling up $$$$$ for unprofitable bizs.

A whole generation of incredible founders & brand builders were told this unrealistic image of what a biz should be was the new goal. Meanwhile most of them are now less valuable than the average biz.

We talk up the big rounds and bizs with big potential, or we tear down dead bizs. But nobody ever goes back to dissect what actually happened and, importantly, what should have happened.

A lot of what I write about aren’t necessarily bad bizs. They were just run a bad way, pushed to the extremes, and basically ended up being financial experiments. But I’m obsessed with learning from the mistakes and thinking about what could have been.

Truth is, these founders took incredible risks. They had ingenious insights about human behavior that got perverted after too much money and too many cooks in the kitchen. But we can analyze their stories, strategies and what financials.

At the same time, there are so many great lessons to learn from people who are building real sustainable businesses that do great things for the world or are creating huge outcomes for the founders—they may not grab the TechCrunch headlines.

But who are those founders? What are their stories? What lessons can we take to help build our own bizs?

Not everything always needs to be the multi-billion dollar outcome to be a huge success. 

Those are the “unicorns” for a reason. You don’t have to be one. Horses are pretty great.

Let’s Examine This Biz

Stitch Fix, the OG quiz funnel, is cratering and won’t see 2026.

Trading at $3.72/share with a $447m market cap, it’s -88% over the last 5 years.

COVID wasn’t particularly great for this brand, and the RTO hype that never happened was the death blow for this brand. Throughout H2 2021 & 2022, you can see investors lose faith in the concept/biz model, and traded this stock into irrelevance.

This stock either dies or has one of the most heroic turnarounds in corporate history. Today, we’re betting on option 1.

Financial Summary

TLDR Analysis: Weathering the Death Spiral

• Opex is 53% of Rev on a 42% Gross Margin biz. 🤮

• This biz isn’t growing. 3 yr CAGR is -8%. 😰 

• They have $239m in cash to weather the storm. 👍

This is a unique biz to analyze: a bad biz with a strong balance sheet. The opposite of what I’m used to looking at.

Despite lighting mountains of cash on fire and losing $381m from operations the last 2 years, they’ve kept their debt in check + have a strong cash position. Shoutout to the Finance team over at Stitch Fix keeping everything afloat while the biz is tanking. 

It’s going to put this biz in a weird zombie state. They can’t afford to grow because the unit economics of the biz are trash, but they have enough cash to fund the slow descent for 1-2 years. 

Let Me Save You Money - Sponsored Section

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There are tons of FBA mistakes you’re entitled to get reimbursed for, but Amazon makes it intentionally difficult to file claims because they don’t want you to take money out of their pocket. 

You are entitled to reimbursements when they mess up, but of course they’ll never tell you that. 

You have to read through BOLs, track shipments and inventory movement. It’s a ton of complicated, manual, boring work. But if you figure it out you get ~1-2% of your Amazon sales back.

1 of the brands I work with was only filing a couple of claims/yr. They didn’t realize how many claims they should be filing/mo. Last week Joel MacPherson (a CPA) reached out to me, and we took a chance. In all fairness it took 3 minutes to sign up.

We were blown away with the results. Within a few hours Joel & his team of auditors found $20k in immediate reimbursements, which was more money than we had found all year. They won 6 cases the first day, while filing more cases we’re confident we’ll win. 

His biz, TrueOps is helping 1,011+ brands like Natural Dog Company + CROSSNET (collectively doing $2.6B in Amazon sales) reclaim millions in reimbursements that Amazon owes them.

And the best part? 

TrueOps only charges 10% commissions when they win, half the going rate for most reimbursement services. Using exclusively North American auditors. That means native English speakers who can escalate to phone calls when needed.

Unlike other providers that charge for inventory found, they only charge when you get cash from Amazon and automatically reverse their commissions.

This is a biz founded by eCom brand owners who solved their own problem, spun out a biz to help others, and are now taking the market by storm. 

To make this an absolute no-brainer, when you sign up (link here), Joel will give you your first $10k in reimbursements for free. 

It takes <5 mins to set up.

Right now, adding every $ back to your Amazon bottom line counts. This is truly another free $$ opportunity. You’ll thank me later.

Let’s Fix This Biz!

Here are the 3 steps I’d take to save Stitch Fix from bankruptcy.

1) Pick a Lane

Stitch Fix is dying in the dreaded middle. They want to present popular brands with curated styles at an affordable price point but also be profitable. Which they are miles away from being.

An enormous mistake I continually see founders make is not having a strong opinion on what market they are pursuing. In the early days, when you are just trying to get to market and figure it out, wide is fine.

But every brand gets to an inflection point where you have a couple of core segments/audiences you have to stick and commit to. You’ll need to go all in on because their feedback and the language that they want you to speak has its unique needs. 

At scale, you’ll have the resources to invest in multiple segments, but there’s always a point in the brand life where you need to pick, because it requires all of the bizs resources at that point in time.

Stitch Fix hit that moment and picked the wrong door. Very similar to when Allbirds got ready for IPO and shifted from a “niche” fashion brand to an everything-for-everyone brand, trying to appeal to Wall St.’s objection to future growth. That’s the continued challenge for this generation of brands.

Instead of trying to be the Stylist for everyone, they need to pick 2-3 audiences and continue to go deep. All of their key metrics are heading in the wrong direction:

1. Active customers: -13% YoY

2. Rev/customer: -9% YoY

Some of this is macro, and many customers can’t afford a “premium offering” anymore. But a big part of this is also trying to appeal to too many customers + too many user groups too early. 

With falling sales + hemorrhaging $$$, they’ll have to retreat to support the working Millennial who’s looking for Work + Going out-fits.

But as Athleisure + Gen Z fashion continue to become the main fashion market, Stitch Fix will have to continue to play this tightrope game of what to focus on.

Takeaway: Your customers determine your market. Your market determines your customers.

2)  10x AOV

While investors love the subscription model, it makes no sense for this biz.

As a customer, I pay a style fee (monthly) to get a box of 5 items shipped to my house, then I can decide which items I want to keep = I buy them from Stitch Fix for a discounted price.

Stitch Fix is selling that they have 1k+ styles across popular brands.

Really, what they are saying is they are a remote stylist that allows you to try on products at home which are a perfect fit and whatever you don’t want they happily take a return on.

These are peak DTC-ridiculous value props. 

If only they could hit the technological utopia of removing the human from the interaction and magically vanish fulfillment costs, this biz will work.

Here’s the main problem and why most subscription programs are failing in consumer. They all have the Dating app problem. The most successful use case of the product is that the user stops needing it.

After Stitch Fix figures out my style, and I replenish my wardrobe, I’m done. I’m going to cancel my subscription + not come back for a long time because I have the clothes I need.

So, Stitch Fix just spent a huge amount of CAC to get consumers to buy other brands’ products + pay stylists. So we took the already razor thin retail model, added more human labor + eCom fulfillment costs to the biz model. It shouldn’t be surprising this biz is hemorrhaging cash.

Instead of a monthly subscription, this biz should be focusing on wardrobe overhauls (massive AOV). Something luxury has done for a long time. 

But instead of trying to bring a rotation of quality products to Zillenial fast fashion trends, they should be focused on Queer Eye-style complete makeovers. Target someone to buy 20-30 items as they overhaul their wardrobe, not drip 5 items/mo out over 6 months where half are returned.

By focusing on $5-$10k orders where customers can have an At Home sizing + Style Concierge (premium service upsell) then commit to buying a massive bulk order.

Stitch will generate enough Revenue to offset the terrible margins of this Reseller + Style labor biz. And it’s highly likely the customer keeps the majority to all of their items (where the real profits are made).

There’s a reason none of the other big retailers are offering this type of program. Sometimes there are “white” spaces for a reason.

Takeaway: Focus on providing the most value while remaining profitable.

3) Turn Stitch Fix into a Hedge Fund

Stitch Fix generated more cash from investing in securities $76.2m in 2023 then they did from operating Stitch Fix $57.8m.

Stitch Fix would have actually made more from stock trading investing in 2023, but they have to include Purchase of Property and Equipment (PP&E) in their investing activities. Someone on their team clearly knows how to trade securities and place the right bets.

This is more of a joke than anything to show how poorly the operations are going. But when you can make more money protecting your money than you can operating your biz, the path forward becomes clear.

Shut it down.

Takeaway: Let’s hire the Finance person who’s making these trades.

Final Thought

We’ve analyzed so many great biz ideas that turned into bad bizs because of Growth expectations. Almost all of them lost the script and started to believe they were technology bizs, not Consumer product bizs.

All of these strategies, tactics, and financial hacks that brands have been using for the past 10 years fail miserably when analyzed against 1 simple metric:

How profitably can I get my item to my customers?

Think about this as COGS + Fulfillment + Ads.

When strategies are optimized around profitable delivery to customers, they take off.

That’s why you see brands like Crocs, ELF, and Oddity continue to thrive. They push the boundaries of what is possible, while tying in new initiatives to eliminate below-the-line items from their P&L.

They aren’t obsessed with being a Retail or DTC biz. They aren’t obsessed with their ROAS. They’re obsessed with getting their product to their customer as profitably as possible. By any channel necessary.

So many of the brands we’ve analyzed do the opposite. 

They make massive investments in their Technology and/or Supply chain infrastructure, but it doesn’t actually reduce their costs. Frequently because the cost savings will only come at a scale that the biz will never get to.

They’d have to burn way more cash and make incredibly expensive acquisitions to get to the point where they’d realize the savings. 

Looking at you Stitch Fix, Rent the Runway, Wish, Barkbox, Peloton.

Somewhere in the experimentation craze of the last 10 years, the discipline of tying major innovation investments to saving money went out the door.

Everyone got so excited about cheap Facebook CPAs (even long after they weren’t cheap) that a core focus of biz was tossed out the window. 

And that led many great ideas down the wrong path.