Description

I advocate a long position in the common stock of Stitch Fix, Inc. (“SFIX” or the “Company”), as it is undervalued by the market with an intrinsic value of ~$12, representing upside of approximately 100%.

i). Penetration opportunity in the kids, plus size categories, and internationally

-          I think the opportunity in the plus size category is most appealing here given the margins, reach, and the chance for customers to try on clothes from their home (avoiding the sometimes awkward experience for this category when looking for sizes in stores)

-          Kids is another good opportunity as it helps avoid the dressing room experience but also allows personalization and access to different unique brands that you do not get from many online players

-          Men’s is more replenishment purchases so good category for shop your colors etc.

ii). Ability to get and harness intimate data on customers and their families (flywheel – more users/more data, better outfit picks, wider selection, better user experience, more efficient purchasing, lower costs)

-          In addition to getting data on customer sizes, they get other valuable data such as preferences, styles, colors, existing wardrobe, budget etc.

-          The most appealing part here, in my opinion, is the feedback loop (customers actually tell SFIX why they didn’t like certain items in a “fix”/box of 5 which is great for improving the next “fix” and the company’s numbers actually show how they have been able to use that data to improve the selections (and in turn the keep rates) for customers

-          They also use the data to develop their private label brands as they have insight into what clothes and styles customers want

iii). Simple, easy to use product and great customer service

iv). Secular tailwinds with ecommerce and personalization

-          As you see from the food delivery companies, convenience is something customers seem willing to pay for; SFIX serves that need for customers who don’t have the time to shop, are not close to stores, don’t like shopping, value style advice, and want to learn about new/different brands

-          Dual working families who have no time to shop for themselves or their kids

v). Favorable competitive landscape

-          SFIX is the market leader with Amazon Personal Shopper a new entrant (validation that personalization is catching on? - Also, need to research if this is a valid threat or overblown)

-          Some main differences with Amazon’s offering are price (AMZN charges a $4.99 monthly subscription versus $20/fix for SFIX which gets fully credited towards items customers keep) and selection (only limited to certain sizes within women and men so far)

-          Unlike Amazon, personalization is the core competency of SFIX, SFIX has been around longer, and serves a wider market with a wider selection of brands

-          Additionally, as I mentioned on the phone, I think of Amazon’s edge being in tech and not really personalization/human stylist like SFIX (who have ~5,100 stylists providing the human touch)

-          Trunk Club from Nordstrom is closest competitor but doesn’t really compare

vi). Strong emotional connection with the customer and good negative working capital dynamic

-          While it could be a little early here, this helps as they grow their private label business which could make SFIX very compelling especially given the economics and logistics around private label apparel

-          The connection with the customer coupled with the data makes it an appealing acquisition target for retailers that want to build direct relationships with customers

vii). Attractive current valuation 

Catalyst

Sale to a strategic