Stitch Fix reported Q2 earnings and issued weaker guidance yesterday, prompting public market investors to hammer the stock (-42% at one point) which lowered $SFIX Market Cap to $1.6B
The drop in value would appear to be outsized as SFIX remains profitable and growing
But...👇🏼
The drop in value would appear to be outsized as SFIX remains profitable and growing
But...👇🏼
2/ On the earnings call, CEO Katrina Lake cited promotionality and reliance on FB as headwinds for future expansion
To combat those forces, Lake noted a forthcoming shift in creative and brand marketing spend, as well as product offerings at lower price points to broaden appeal
To combat those forces, Lake noted a forthcoming shift in creative and brand marketing spend, as well as product offerings at lower price points to broaden appeal
3/ While these may be effective strategies for a business operating at high margins, the result of lower prices may in fact be dubious for a business with sub 50 Gross Margins (%), razor thin operating margins (>3%), and minimal free cash flow
4/ In my estimation, the response from public investors was not relative to concerns over Stitch Fix go forward strategy or macro trends, but rather deeper concerns over competition that delivers a similar solve for Stitch Fix 3.5M users: Rent The Runway (>$1.5B valuation)
5/ In the early days, RTR’s strategy and operating model was very different from SFIX. RTR was an occasion based rental service for designer apparel, handbags and accessories until 2017 when they introduced an unlimited subscription service and expanded brands for $159/mo
6/ This proved to be a game changer for RTR, which now derives 70% from its subscription business. The model has been so successful that the company has introduced two other service tiers: $89 and $139
This shift in business model has lead to strong tgt cust overlap with SFIX
This shift in business model has lead to strong tgt cust overlap with SFIX
7/ When looking at the customer economics, the outlook becomes gloomier for SFIX
According to Q2 ER, they derive $501 of Net Revs per active user (trailing 4 QTRs)
Compare this to RTR (assuming full year cust retention
$159 x 12 = $1908
$139 x 12 = $1668
$89 x 12 = $1068
According to Q2 ER, they derive $501 of Net Revs per active user (trailing 4 QTRs)
Compare this to RTR (assuming full year cust retention
$159 x 12 = $1908
$139 x 12 = $1668
$89 x 12 = $1068
8/ What is also important to understand when comparing Net Rev / User is that SFIX buys and sells their inventory (COGS) while RTR buys and owns their inventory as a depreciating asset. Onlythe depreciation hits their unit economics as a variable cost per transaction
9/ This effectively means that RTR likely not only generates greater Revenue per customer but also considerably higher contribution margin per customer (assuming all else equal)
This fact alone should cast considerable doubt on SFIX ability to grow and compete against RTR
This fact alone should cast considerable doubt on SFIX ability to grow and compete against RTR
