Should Stitch Fix go public, it would be the biggest retail offering since Etsy two years ago. Perhaps more important, it would be a Silicon Valley rarity: a profitable company that did not raise money at a sky-high valuation, and one that could potentially tap the public markets at a price many times greater than its current value.
Stitch Fix is not the first company to try this business model. Similar start-ups, from clothing rival Trunk Club to the cosmetics specialist Birchbox, have found a market mailing consumers a grab bag of items and offering free returns for anything unwanted.
But many such start-ups have had trouble keeping costs down, and customers around. Nordstrom, which bought Trunk Club in 2014 for a reported $350 million, wrote down nearly $200 million from the business’ value last year.
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“Those businesses have mostly struggled to grow and remain profitable over a long period of time,” said Mark Cohen, a professor at Columbia Business School who previously served as chief executive of Sears Canada. “Will a loyalist want to receive this every month? Is anyone interested in consuming this much apparel and accessories?”
So far, Stitch Fix has found success where other online clothing start-ups have struggled. To the company’s founder, Katrina Lake, success comes down to delivering what consumers want: making it easier to shop.
“There’s been a lot of innovation around being the cheapest or fastest,” she said in an interview at one of the company’s warehouses south of San Francisco. In her view, what was important was helping customers find clothing they liked without taking lengthy shopping trips and returning dozens of items.
Stitch Fix was founded in 2011 and was initially run out of Ms. Lake’s apartment in Cambridge, Mass. At first the company catered only to women, but has since expanded to offer men’s clothing, plus sizes and maternity wear.
Each box contains a handful of selections from trendy brands like Citizens of Humanity, Scotch & Soda and Barbour. Up next is a “luxe” offering featuring clothes from higher-end labels like Theory, with price tags going from $150 to about $500 per item.
Expansion plans like that drive home the diverging fortunes of struggling traditional retailers and fast-growing online rivals.
Online retailers who sell luxury products for less are undercutting sales at high-end department stores like Neiman Marcus. Nordstrom recently announced layoffs and told investors it plans to focus on e-commerce, despite its Trunk Club write-down. And J. Crew, which has hundreds of stores around the country, has suffered three straight years of losses and is deeply in debt.
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While early e-commerce start-ups like One Kings Lane, Gilt Groupe and Fab were failures for investors, the category has picked up steam in the past few years as traditional retailers have looked to start-ups to lift their businesses. Jet sold itself to Walmart for $3 billion. Last year the subscription razor service Dollar Shave Club sold to Unilever for $1 billion. And the online pet store Chewy.com was acquired by PetSmart, reportedly for more than $3 billion. Some start-ups have also moved away from models that compete for customers on price or rely on fads, like flash sales, for traction.
Stitch Fix’s pitch is straightforward enough: Trust the company to pick out your tops, bottoms, shoes or accessories for you.
When customers sign up, they fill out an extensive form detailing style preferences, clothing needs and price points. The start-up’s algorithms then churn out a set of potential choices, which one of its 3,400 stylists — most of them part time — then tailors to the individual customer before sending out five items in a package. Anything a customer does not want can be returned free of charge, and customers receive a 25 percent discount when they buy everything in the box.
At the company’s warehouse, Eric Colson, formerly a top data scientist at Netflix, spoke to the role that data science — once the province of high-tech giants — plays in nearly every aspect of the Stitch Fix business.
Mr. Colson excitedly illustrated on whiteboards how the company’s systems can narrow down a broad range of women’s pants to a relative few that each individual customer is statistically likely to keep.
“Customers say, ‘This thing you picked out for me, I would never have picked it out for myself,’” he said.
Algorithms have even cut the number of steps needed for workers to pick out clothes for individual clients.
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Christie Hemm Klok for The New York Times
“Some people call this the ‘Moneyball’ of fashion,” said Bill Gurley of the venture capital firm Benchmark, who sits on Stitch Fix’s board. “The level of data science done at this company compared to the incumbent set is incomparable.”
But that data-driven approach has also been yoked to Ms. Lake’s insistence on running a financially healthy company. Given her early troubles raising money from outside investors, Ms. Lake worked toward becoming profitable early.
“We had a ‘lean plan’ and a ‘lean-lean plan,’” Ms. Lake said of the business model.
Stitch Fix declined to say what percentage of items are returned.
Running so cheaply meant not taking out ads during Stitch Fix’s early days. But word of mouth helped the company grow — and eventually drew investors like Mr. Gurley, whose interest was piqued by the number of assistants at his firm who swore by the service.
Yet the question remains whether customers who are initially thrilled by receiving a customized box of clothing will remain customers for months or even years.
Lauren Rivellino, an optometrist in Charlotte, Va., was a Stitch Fix enthusiast when she subscribed in 2015. She loved trying clothes on at home rather than a poorly lit dressing room, and most items were flattering and reflected her style.
But a year later, Ms. Rivellino stopped using the service. “I really have nothing bad to say about them,” she said in a recent email. “I just don’t shop a lot.”
Stitch Fix executives declined to share their retention statistics, but claim that they are above industry averages. Ms. Lake and Mr. Colson acknowledged that clients stop using the service for a variety of reasons, from dissatisfaction to their closets simply filling up.
But the two argued that the company can analyze scores of data points to figure out ways to coax these customers back to the fold.
