Stitch Fix’s Death Spiral

TLDR;

- Scaling Meet and Greets

- Unpacking Stitch Fix’s Death Spiral

LBAB Community: Building a Working with Me doc

I hate talking about myself. 

(I appreciate the irony coming from the guy who writes a daily on LinkedIn and a weekly newsletter.)

But it’s something that always made me uncomfortable. I’m proud of what I’ve accomplished in my life, but it’s always felt weird to talk about my accomplishments, and it’s been hard to figure out what to share when meeting new people. 

Nailing the right balance of relevant and personal stories is always something I’ve understood the value of, but I didn’t appreciate the mental capacity needed to effectively do it.

The other side of this is that all the meet and greet calls I’ve done in my roles are incredibly time-consuming. Those 20 min sync calls every time a new person joins a company or when I get a new job. Repeating the same thing over and over again gets old.

Which is why I decided to build a Working with Jeremy doc. 

I’ve seen these from successful leaders and previous bosses. The concept is simple and brilliant:

• Put all your principles + philosophies into 1 doc. 

• Share it with everyone.

• Scale Meet and Greets. 

If you manage other people, I can’t begin to tell you how valuable a doc like this is.

There are many different flavors of how to build these docs. Mine is far from perfect. There are even still some sections that are WIP. But I wanted to share this as an example if you’re interested in building your own. I set it up so you can easily duplicate the page if you want to have a template to start with. 

Now, let’s dive into the “inventor” of the style quiz and talk about what in G-d’s green Earth is going on over at Stitch Fix.

Let’s Examine This Biz

Stitch Fix, the OG quiz biz, has entered its death spiral and is stuck in the “too little too late” category:

• $3.97/share -77% from Nov 2017 IPO (-96% from COVID high)

• $468m cap

• 0.20x Rev Multiple

The stock’s been brutalized by the post-COVID pullback, and the future doesn’t look bright for the inventors of the Style quiz.

Today, we’re going to take this in a slightly different direction and cover:

1. Why Stitch Fix is an unacquirable asset. 

2. Why, despite being a truly valuable CX, its background makes it impossible to be an enduring brand.

TLDR Analysis: The Beginning of the End.

• Customers are shrinking (-9% YoY) while Rev/Customer is increasing (+8%). 😐

• Marketing is increasing (+5% YoY) to drive less Rev (-1%). 😬

• OPEX is 54% of Rev but GM% is 44% 🤮

• They have $130m in Cash & Equivalents + $100m in credit facility 😨 

This is what it looks like to watch a strong biz crack under too much growth.

These numbers might not look bad, but this is the moment after the ship hits the iceberg and starts taking on water. Passengers aren’t jumping overboard yet, but they will as it takes on more and more water.

I’ve talked to a bunch of bizs recently that are in a similar situation, where their P&L is upside down, with OPEX higher than Gross Profits. Let’s dig into a tactical plan on how to correct this problem before it’s too late for your biz.

Let’s Fix This Biz

There are the 3 steps Stitch Fix needs to take to save its biz—but won’t be able to in the public markets. At the same time, its poor financials make it unpalatable to take private. But let’s hold out hope.

1) Ruthlessly Cut Deeper

Last year, Stitch Fix entered a restructuring plan, cutting 15% of Salaried positions (4% of total roles). 

It was too little too late.

Stitch Fix boasts this incredible algorithm that “removes the overhead of the traditional salesperson-led retail model” and creates margin through eliminating OPEX. But they also have 1k personal stylists on payroll.

The hypothesis might work, but they won’t have the runway to validate it. For a biz with 45% GM %, OPEX at 54% of Rev spent isn’t going to survive.

Their problem: The plane ran out of fuel halfway and there’s no $ to refuel.

If they want this biz to survive, they need to ruthlessly cut costs. 

• Marketing isn’t really crushing it. (Also is only 9% of Sales) 

• SG&A is bundled into 1 massive line item, but we’ve looked at enough of these bizs to know.

  • The logistics (& reverse logistics) are sucking up piles of cash.

  • Too many employees (not including 1k stylists) for a biz this size/margin profile.

The only real place to cut here is Headcount. Leadership needs to take a lesson from Elon at Twitter and truly determine how many of the 5,860 people really need to work at the company.

My guess is you can start by RIFing 50% of the workforce. Then start looking for equilibrium from there. 

Stitch Fix also needs to address the 1k Stylists on staff. I’m all for Human-powered automation, but how well is the AI working if there still needs to be that many humans involved?

Takeaway: OPEX <<< Gross Profits. Always.

2) Shrink the customer base & increase prices

Stitch Fix is bigger than it should be. Customers are dropping like flies. They can’t effectively acquire new customers, and sales are shrinking.

The market is telling Stitch Fix they’ve hit a ceiling. They’re a biz with:

• High churn cycles → Customers’ closets eventually get full

• High Return rates → Traditionally 30-50% in Fashion

• Low Margin <45% → Mostly selling others’ products

Halting Growth is an existentially bad sign.

The biz has grown too big too quickly, and now we’re watching it collapse in on itself. 

Don’t get me wrong: there’s a great, beautiful biz trapped under the weight of all this growth-at-all-costs hogwash. But it got too bloated, and we need to remove the excess growth.

The swiftest way to solve this problem is to start and continue increasing prices prices until there’s enough Gross Margin to at least cover OPEX. That’s why step #1 above is fundamental. 

Lower OPEX = Fewer Price Increases.

There’s a delicate balance to manage. This strategy will price out customers and drive more churn. The biz can’t get stuck with too much inventory, so there’s a necessary cat-and-mouse game that need to be played.

As they increase prices, they’ll also need to run Clearance sales to liquidate slow-moving inventory and save face with churning customers. 

It’ll be a painful couple of years to find the right balance of price point vs. size of customer base, but that’s the hard work this biz needs to survive.

Takeaway: Growth from Profits >>>> Growing Customer base.

3) Get into another Market or deprioritize Subscriptions.

From here, Stitch Fix has 2 options: 

1. Stick to the Subscription box model and move into other verticals

2. Become a traditional retailer with 1-off purchases.

Fashion and subscription don’t blend because clothes aren’t consumable items. This isn’t the Chewy model where I need more every month because I’ve used up last month’s box.

When I get a great piece of clothing that I love, I keep it. When I’ve hit enough successful purchases, my closet is full. There’s no need for more on a consistent basis. So, either we find other things to sell under this model, or they take the customer data they have and bet on being an AI retailer.

In the same way that SHEIN produces TikTok trends to power their merchandising, Stitch Fix can go SUPER deep on customers’ wardrobes and make really smart recommendations + predictions.

Go further than the quiz. 

Have customers share their full wardrobe with you (Photos), ask what they want to buy next and power a personalized shopping experience where they can buy recommended items from Stitch Fix:

Leverage data from 3m+ customers to recommend purchases, reducing returns/unsellable inventory, then collect further data to predict what trends are coming next.

This will allow them to attract more new customers who aren’t ready to subscribe to a monthly box, and retain churning subscribers. An additional perk is reducing returns.

They’ve already launched something similar to this with Freestyle but it’s only available to subscribers and haven’t made the required investments to capture the additional data yet.

Time will tell if this super personalized approach is more viable than current customer shopping behavior, but at minimum, the technology will be a valuable asset that someone would acquire. 

Stitch Fix is struggling to make $2B in sales profitable. For some massive Retailers, that’s their annual returns budget.

Takeaway: Market rules everything around me.

Final Thought

The gall of this company to issue a $150m share buyback program in a year with a $214m in Net Operating Loss, had a RIF, and restructured their debt is astonishing to me.

If I weren’t so appalled by it, I’d be more impressed.

The sophisticated strategy of “betting on yourself” to prop up the stock price is a savvy move, but WTF guys?!?! How does no one in the room take a beat to think they should keep the cash as a “rainy day fund” in case they lose another $200m next year.

This play wasn’t from a lack of sophistication or financial discipline.

They have $130m in Cash & Equivalents + a $100m credit facility, but they also have $235m in outstanding enforceable inventory purchasing commitments. Their Finance team is cranking on all cylinders balancing short- and long-term investments against current cash, but the biz isn’t in a healthy enough place.

It doesn’t really feel like the smart long-term move to use $150m in share buybacks when the biz is barreling toward a brick wall. 

I can’t speak to their motivations, but it really feels like Leadership is playing the insiders game to prop the stock price up to boost their short-term comp.

While the incentives are obvious there, it feels like a Vampire tactic to get the last drop out before the biz goes under. That being said, as the leaders of the biz, it’s their call. Until I put up the $500m to acquire this thing it’s not my decision to make.

And I wouldn’t touch this biz with a 1000ft pole.

🧠 The Takeaways

"Growth for the sake of growth is the ideology of a cancer cell." - Edward Abbey

1. OPEX should never be >>> Gross Margins.

2. Increasing Prices shrink the customer base. Finding the right profit balance is the name of the game.

3. Subscription bizs have a finite market. Take the model into other markets, or break the model to extend more into the core.