Please read the important disclosures at the end of this document.

Goodwater Thesis is designed to help entrepreneurs understand the Winning Strategies that successful startups leveraged to reach the IPO threshold, and the key milestones they must achieve to reach The Next Level of a durable, category-leading franchise.

Executive Summary

Stitch Fix (www.stitchfix.com) is a data-driven, personal styling service that is transforming the retail experience. The company’s combination of data science and human judgment differentiates it within the highly competitive e-commerce sector, enabling Stitch Fix to provide personalized retail at scale. Founded in 2011, the company became profitable in 2014 after raising $42.5 million of equity capital – an impressive feat within owned-inventory e-commerce. As of July 2017, the company has grown to almost $1 billion in revenue and 2.2 million active users. As Stitch Fix enters this new phase of growth post-IPO, Stitch Fix will be focused on growing its customer base, innovating on its proprietary data science capabilities, and expanding into new markets.

Transforming Retail

Stitch Fix’s mission is to “transform the way people find what they love, one client at a time and one Fix at a time”1. Stitch Fix is at the forefront of a retail macro shift from a “browse-all” model to a curated, convenience-driven model. The company addresses consumer pain points in the shopping experience by gathering personal preferences on style, fit, and size to offer a curated box containing a combination of hand-selected items that clients can try on in the convenience of their home. Stitch Fix employs over 3,400 stylists, in addition to over 75 data scientists who develop proprietary algorithms that power the customer experience, new style development, and business operations.

The Market Opportunity

The U.S. apparel, shoes and accessories market is massive at $353 billion in 2016. According to Euromonitor, the e-commerce portion of this market was $55 billion, representing 15.5% of the total market, and is expected to represent 22.3% of the total market by 20212. Over the last several years, traditional retailers have been challenged by highly personalized and convenient tech-enabled commerce services. Incumbent retailers and brands have struggled to win the Millennial and Gen Z demographics that expect personalization. These consumer preferences are driving a shift to a “push” approach to shopping – curation and personalization – rather than the traditional browsing-focused shopping experience. Stitch Fix is a leader within the subscription, personalized e-commerce space, and represents only less than 2% of the US e-commerce market with significant room to gain market share.

Winning Strategies

What can entrepreneurs and investors learn from Stitch Fix’s path to IPO?

  • Virtuous cycle of sustainable unit economics. Stitch Fix generates attractive unit economics, allowing it to scale more rapidly and profitably than typical e-commerce businesses. The company grew its customer base by a compounded annual growth rate (CAGR) of 103% from 0.3M in 2014 to 2.2M in 2017, while maintaining marketing costs at 3% and 7% of net revenue in 2016 and 2017, respectively, well-below industry norms in the mid- to high-teens. Using Second Measure data, we estimate Stitch Fix’s user acquisition cost is roughly $35-40. On a unit basis, Stitch Fix breaks even on its acquisition cost with a single average order of $125, assuming 30% contribution margin. By achieving attractive unit economics, Stitch Fix has the flexibility to scale the business efficiently while investing in growth opportunities.
  • Data science as a foundation. Stitch Fix has perfected the combination of data and contextual human judgment, and improving algorithmic recommendations, driving a positive virtuous cycle of increased conversions and higher retention. The average Stitch Fix client directly provides over 85 meaningful data points through her style profile. This data combined with other sources enables Stitch Fix to provide highly personalized customer experiences. The company had repeat purchase rates of 83% and 86%, respectively, in 2016 and 20173. The company indicated that 70% of clients returned for a second “fix” within 90 days and 39% spend over half of their apparel wallet share with the service as evidenced by a 22% increase in 2017 of the number of items purchased since 20144. Stitch Fix used this massive data set to launch their Exclusive Brands, a higher margin private label that accounted for 20% of revenue in 20175. Stitch Fix also effectively leverages data to increase business efficiency by informing demand forecasts, merchandise optimization, fulfillment center assignment, and new style development.
  • Disciplined financial management. Stitch Fix took a highly disciplined approach to growth, optimizing unit economics and perfecting its core product offering. The company achieved profitability in 2014, just three years after launching, and with only $42.5 million equity capital. The team then expanded into new categories, including petite, maternity, men’s, plus size, shoes and accessories. Revenue increased at 137% CAGR from 2014 to 2017. In 2017, revenue increased by 34% , up from $730 million to nearly $1 billion6. Adjusted EBITDA increased from a loss of $4 million in 2014 to $60.5 million in 2017, representing an EBITDA margin of 6%. Stitch Fix also increased gross margin from 35% in 2014 to 44% in 2017, largely driven by the launch of its higher margin Exclusive Brands product built from its extensive data on merchandise preferences and attributes. Stitch Fix exhibits financial metrics in line with best-in-class e-commerce businesses, which will have a positive impact on its long-term upside potential.






The Next Level

How does Stitch Fix continue its path toward market leadership?

  • Outpace competitor innovation. Stitch Fix will face increased competition from the marketplace with growth in e-commerce and new entrants in AI-driven curation models. Amazon recently launched its subscription box Amazon Prime Wardrobe, and other competitors have launched subscription models on top of existing e-commerce platforms. Stitch Fix will need to continually refine its algorithm and data science-human feedback loop to offer a superior product offering. The Company benefits from enormous market potential in which there will be many winners, and remains well-positioned to drive leadership in the subscription marketplace.
  • Customer growth and retention. Stitch Fix has successfully scaled its active user base at a 103% CAGR since 2014, reaching 2.2 million in July 2017. The company has grown efficiently with impressive unit economics and marketing costs at only 7% of net revenue, and will need to find new, efficient methods to continue to scale its customer base. Stitch Fix also needs to maintain high retention through continual improvement of its algorithms and superior customer service. The company needs to recruit and retain high quality stylists for new product categories and its existing core women’s business in the face of increasing competition for high quality “part-time” workers with the growing popularity of sharing-economy services.
  • Product and category expansion. Founded in 2011, Stitch Fix started with women’s apparel, which continues to be the dominant source of revenue. After achieving positive cash flow in 2014, the company expanded to petite, maternity, men’s, plus size, shoes, and accessories. Lake indicated that plus-size will generate more revenue in the first month than the business generated in its first year. Men’s launched and within six months reached the same size as women’s reached within 3.5 years7. Stitch Fix will need to become relevant across additional product categories and demographics.

Business Overview

Stitch Fix is a personal styling service transforming the retail experience through a mix of data, personal preferences and human touch. As of July 2017, the company has over 5800 employees, including over 3400 stylists, 1500 fulfillment centers, 200 client experience centers, 95 engineers, and 75 data scientists.

How it works. To start using Stitch Fix, clients fill in a style profile questionnaire where clients provide personal preferences on style, fit, size, and price. Clients can then select the frequency, electing to either auto-ship at a set cadence or request the service on-demand as needed. Stitch Fix then sends each client a “fix”, or a box containing a personalized selection of apparel, shoes and accessories. Each fix contains five items, which she can try on in the convenience of her home. Within 3 days, she then identifies which items to keep, and returns the rest in a prepaid bag. There is a $20 styling fee attached to every box, which can be credited towards merchandise purchased. Customers who want to keep all the five items get a 25% discount on the order.

Merchandise. The average price point for a Stitch Fix item is $55, but starts at $20 to $30 for items like costume jewelry and tank tops, and can reach $200 to $300 for dresses and coats. Today, the buying team works with over 700 established and emerging brands8, offering items for Women’s, Petite, Maternity, Men’s and Plus. Stitch Fix has also leveraged its proprietary data to design and launch its own private label, or Exclusive Brands. The company has launched over 15 Exclusive Brands, which made up over 20% of revenue in 2017.

Data Science. Stitch Fix is driven by “millions and millions”9 of rich client data points and merchandise data points. The average Stitch Fix client directly provides over 85 meaningful data points through her style profile, and detailed merchandise data such as item measurements, attributes and descriptors are encoded for each SKU. Stitch Fix employs over 75 data scientists who develop proprietary algorithms that power both the customer experience and business efficiency. By delivering a positive customer experience, clients are motivated to provide even more data points over time. An item included in a box that is typically purchased 52% of the time can increase to an 80% conversion based on algorithmic matching10.

Data algorithms support the client experience:

  • Styling: Analyze client-level, item-level, and fix-level data to match client preferences with available inventory.
  • New style development: Identify underserved or unmet client needs and create a solution to that need by disaggregated item attributes and recombining desired traits into apparel items.
  • Stylist assignment: Optimize matching between clients and stylists based on history, affinities, geography, and client stated and latent preferences.

Data also drives business efficiency:

  • Demand forecasting: Forecast demand for specific categories and styles while minimizing excess supply.
  • Merchandise optimization: Inform what merchandise to buy, sizing, and real-time inventory allocation.
  • Fulfillment center assignment and optimization: Fulfillment centers are selected based on its inventory and location relative to the client. Algorithms optimize the paths that associates spend in navigating the vast fulfillment centers, lowering labor costs.

Stylists. Stitch Fix has over 3,400 stylists who work remotely part-time and are paid hourly. Stylists are empowered with custom styling tools that leverage the database and algorithms. They are not compensated based on commission to have the flexibility to suggest less expensive items. Stylists deliver the critical human component required to build one-to-one relationships, make better recommendations, and provide a personalized experience. They provide the creativity, empathy, and context to deliver Fixes that customers love at scale.

Cohort Analysis and Retention. The company grew its customer base by 103% CAGR from 0.3M in 2014 to 2.2M in 2017, while maintaining marketing costs at 3% and 7% of net revenue in 2016 and 2017, respectively, well-below industry norms in the mid- to high-teens. Stitch Fix also increased its 26-week 1H 2017 cohort by 10% over the corresponding cohort 1H2016, and has shown consistent 52-week cohort performance of approximately $500 over the last two years, during which time the company scaled its customer base from 0.9M to 2.2M active customers.  104-week cohort revenue for 2015 increased by 12% from 2014.






Stitch Fix generates attractive unit economics, allowing it to scale more rapidly and profitably than typical e-commerce businesses. Using third-party data, we estimate Stitch Fix’s user acquisition cost is $35-40. On a unit basis, Stitch Fix breaks even on its acquisition cost with a single average order of $125, assuming 30% contribution margin. By achieving attractive unit economics, Stitch Fix has the flexibility to scale the business efficiently while investing in growth opportunities.

Based on data from Second Measure (secondmeasure.com), Stitch Fix has exhibited higher retention, particularly within the first 6-month period, compared to subscription e-commerce businesses, suggesting a comparatively higher customer lifetime value. At month six, Stitch Fix has a ~30% retention rate, compared to less than 10% for both Trunk Club and Gilt Groupe. This suggests a faster payback period, and therefore a more favorable lifetime value (LTV) to customer acquisition cost (CAC) ratios. The company has maintained an attractive retention curve for the last two years with efficient marketing costs at 3% and 7% of net revenue in 2016 and 2017, respectively.






Financials. The company achieved profitability in 2014 just three years after launching, and with only $42.5 million total capital. Revenue increased at a 137% CAGR from 2014 to 2017. From 2016 to 2017, revenue increased by 34%, up from $730 million to nearly $1 billion.

Adjusted EBITDA increased from a loss of $4 million in 2014 to $60.5 million in 2017, representing an EBITDA margin of 6%. Stitch Fix also increased gross margin from 35% in 2014 to 44% in 2017, largely driven by the launch of its higher margin Exclusive Brands product built from its extensive data of preferences and attributes.







Market Landscape

The U.S. apparel, shoes and accessories market was a $353 billion industry in 2016, and is expected to grow to $421 billion by 2021. Technology has played a fundamental role in transforming how consumers discover and purchase, driving the expected percentage of e-commerce transactions to increase from 16% in 2016 to 22.3% in 202111.

Retail is a highly competitive space, with a multitude of companies competing on experience, brand, selection, quality, convenience, price, and personalization. Recent technology-enabled services focus on delivering highly consumer-centric experiences, presenting major challenges to traditional retailers. Stitch Fix is a leader within this next generation of online shopping experiences.

Decline of brick and mortar. The majority of retail transactions has taken place in brick-and-mortar stores, where the experience is impersonal, time-consuming, and inconvenient. Users are faced with an overwhelming array of options, and there are not enough sales personnel to provide a personalized experience. Traditional retailers have started investing in online platforms, but continue to struggle in the face of more agile and disruptive competitors. The average monthly department store sales declined $6.4 billion, or 33%, from 2000-201612. These incumbent Stitch Fix competitors primarily consist of local, national, and global department stores (Macy’s, Nordstrom), as well as specialty chains, discount stores, and independent retail stores (TJ Maxx, Payless Shoes).

Digital storefronts – the rise of online commerce. The initial wave of online commerce sought to replicate the offline storefront experience by allowing users to access items via searching or browsing a website. These services offered users low prices and fast delivery, which works well for commoditized products and when users know what they want. However, for users who are not sure what they want, online commerce is a poor experience with overwhelming product selections and lack of guidance. Triggering the rise of digitally native vertical brands, this generation of e-commerce companies sell apparel, shoes and accessories online, offering relatable brands with social media presence, sleek online experiences, and convenient delivery, but still leaves customers unassisted in navigating the sea of online merchandise. Examples include Overstock, Zappos, and Everlane.

Next gen online commerce: A new generation of online and mobile commerce services has innovated on ways to offer consumer-centric shopping experiences that extend beyond increased speed and convenience. These emerging services were catalyzed by learnings from a highly competitive space that has seen many companies shut down. Stitch Fix is not the first to try a personalized and curated model in fashion commerce, but it is one of the most successful because of its data driven approach. Beachmint, for example, sold celebrity curated boxes without a data driven approach and shut down in 201613. Recent companies leverage macro trends in data-driven curation, subscription boxes, access economy, and AI-assisted relationships to provide unprecedented convenient and personalized shopping experiences. There has been a resulting explosion of online commerce companies that are betting on different business models and customer experiences as well as verticals.

Online commerce services offer experiences that range across multiple dimensions, including low cost to luxury, subscription to a la carte, curated to manually selected, and automated to high touch. In parallel, these companies are testing different business models for retail such as subscription rental (Rent the Runway, Gwynnie Bee, RocksBox), subscription purchase (Birchbox, JustFab, MeUndies), curated commerce (Stitch Fix, Trunk Club, Dia & Co), and flash sales (Gilt, Groupon).

Goodwater Consumer Research

Through our proprietary consumer research, we can identify consumer insights and trends based on our customer sentiment score, sentiment word clouds, and survey panels.

Customer Sentiment Score. Goodwater generates a customer sentiment score to understand perceptions of various services. This score answers simple questions such as “How satisfied is Stitch Fix’s user base?” and “How does Stitch Fix compare to Trunk Club?” We ingest thousands of public data sources and process them in real time to derive a proxy for customer satisfaction.

Over the last four quarters, Stitch Fix exhibited a strong, consistent, and increasing customer sentiment score – 79 a year ago to 83 today – surpassing incumbents like Macy’s in Q3 2017. Rent the Runway, a rental service for attire, has similarly demonstrated strong customer love by leveraging data to offer highly personalized customer experiences and to efficiently run its business14. These personalized e-commerce experiences have trended higher relative to earlier e-commerce businesses, suggesting a strong appetite for and higher degree of satisfaction with the disruptive “assisted commerce” model that combines data science and the human touch.

Sentiment word clouds. Our word clouds lay out how consumers most frequently describe a particular product with respect to positive and negative associations. We analyze customer reviews and conduct proprietary interviews and surveys to generate word clouds. Positive sentiment phrases provide insight into how the product is used and which aspects of the product users love, while negative sentiment phrases surface common annoyances, feature requests, and responses to product changes.

Stitch Fix’s word cloud highlights the core experience of receiving a personalized box of clothing. Positive and negative sentiment strongly correlate with how much users like the items in their Fix. Positive sentiment phrases illustrate a strong new customer experience, and that users enjoy the convenience and ease of the service. Users who have positive experiences with Stitch Fix are excited to receive subsequent boxes, enjoy trying new styles, tend to love and fit most pieces, and have confidence in their stylist. Negative sentiment for Stitch Fix comes from users who are not satisfied with the items in their Fix because they are “ugly”, “mainstream”, and not their style. These users feel like their stylist does not choose items based on feedback; sometimes they are need a particular item and are disappointed by item in their Fix.







Survey Panel. Every quarter we launch a 3,000-person consumer survey across a representative panel of consumers representing all ages, demographics and geographies of the US. We systematically track the usage of hundreds of apps, market share changes between competing apps and increased (or decreased) usage of apps within key customer segments.

Across Q2 and Q3 2017, 2% of 6,000 survey respondents reported using Stitch Fix in the last 3 months. Of users who used Stitch Fix, demographics skewed toward females over 30 years old with annual household income above $50,000. The 2% indicates that Stitch Fix is an emerging service with large opportunities for growth.

Survey participants also reported on which services they expect to continue using or use more of, as well as which they expect to stop using or use less of. Comparing expected usage increase to expected usage decrease, we can infer how satisfied consumers are with the service and consistency of expected usage. E-commerce services with the highest expected usage increase were Amazon (91%) and eBay (68%). Conversely, services with the highest expected usage decrease were Houzz (40%) and Letgo (40%). Consumers are most satisfied with Amazon and expect consistent usage. Stitch Fix expected usage increase was 54%, suggesting that customers are satisfied by the experience, compared to expected usage decrease of 35%, indicating that customers may still be assessing the long-term value of the personalized e-commerce shopping experience.







Key Risks

There are a number of risk factors to Stitch Fix’s long-term prospects, including:

  • The Company has significant competition, from both traditional retailers who are becoming more tech-enabled and from newer highly convenient, personalized technology companies. Amazon’s subscription fashion service is a significant potential competitor because of its customer data and logistics infrastructure, but may be at a disadvantage because it is not as well-versed in fashion and does not have an internal army of stylists.
  • Stitch Fix is betting on a significant paradigm shift in how consumers shop for clothing – transitioning from a traditional browse-all experience to a customized experience that offers curation, personalization, and convenience powered by technology. The Company will need to continue increasing consumer awareness of the brand, and continue engaging with their existing clients over time.
  • Fashion is a rapidly evolving industry with changing consumer preferences. Stitch Fix needs to be able to identify apparel trends, predict client tastes, and provide merchandise that satisfies clients. Stitch Fix will also need to enter and grow new categories of merchandise to increase their client growth.
  • Stitch Fix is a retail commerce company and is exposed to the macro risks of a weakening economy and lower discretionary spending.

Comparables Analysis

Stitch Fix exhibits financial metrics in line with best-in-class e-commerce businesses. From 2016 to 2017, revenue increased by 34%, up from $730 million to nearly $1 billion. Adjusted EBITDA increased from a loss of $4 million in 2014 to $60.6 million in 2017, representing an EBITDA margin of 6%. Stitch Fix also increased gross margin from 35% in 2014 to 44% in 2017.

The company set its IPO pricing range at $18 to $20 per share, yielding an estimated market capitalization of approximately $2 billion at the midpoint of the range. Comparable companies including Amazon, Etsy and Yoox trade at 2-4x revenue.

Relevant Funding and M&A

Stitch Fix has raised $42.5M since inception, with the last round in June 2014 valuing the business at an estimated $300M15. Rent the Runway, another next-generation e-commerce company, has raised $176M with a latest valuation of $750M as of December 201616.

There have been several e-commerce acquisitions in the last few years. Within the US, below are notable transactions in the sector.

  • 2014: Trunk Club acquired by Nordstrom for $350 million (4.7x LTM revenue)17 18
  • 2015: Zulily acquired by QVC for $2.4 billion (1.9x LTM revenue)19 20
  • 2016: Dollar Shave Club acquired by Unilever for $1 billion (5.6x LTM revenue, 4.2x 2016E revenue)21 22
  • 2016: Jet acquired by Walmart for $3 billion23

Executive Team

As of July 2017, Stitch Fix has over 5,800 employees, consisting of 3,400 stylists, 1,500 fulfillment center employees, 200 client experience employees, 95 engineers, and 75 data scientists. 55% of the management team identifies as female.

  • Katrina Lake (Founder & CEO): Prior to founding Stitch Fix, Katrina managed the blogger platform at Polyvore, a fashion e-commerce company. She also was an associate at The Parthenon Group and Leader Ventures. Katrina has a BA in Economics from Stanford University and MBA from Harvard University.
  • Paul Yee (CFO): Paul has served as Stitch Fix’s Chief Financial Officer since June 2017. Prior to that, he was CFO at Method Products and served in multiple capacities at Peet’s Coffee & Tea, Inc. and Gap, Inc. Paul has a BA in Urban Studies from Stanford University and MBA from Stanford University.
  • Scott Darling (CLO): Scott has served as Stitch Fix’s Chief Legal Officer since October 2016. Prior to that, Scott was CLO at Beepi, Inc., VP and General Counsel at Trulia, Inc. , VP & General Counsel at Imperva, Inc, and Senior Attorney at Microsoft Corporation. Scott holds a BA in Ethics, Politics and Economics from Yale University and a JD from the University of Michigan.
  • Mike Smith (COO): Mike has served as Stitch Fix’s Chief Operating Officer since September 2017. Prior to that, he served as General Manager of Stitch Fix Men (2016-2017) and COO (2012-2016). Mike has also served as COO of Walmart.com, and has a BA from University of Virginia and MBA from the University of California, Berkeley.
  • Cathy Polinsky (CTO): Cathy served as Stitch Fix’s Chief Technology Officer since October 2016. Prior to that, she held engineering management roles at Salesforce, Yahoo!, Oracle, and Amazon. Cathy has a BA in Computer Science from Swarthmore College.
  • Eric Colson (Chief Algorithms Officer): Eric has served as Stitch Fix’s Chief Algorithms Officer since August 2012. Prior to that, he was VP of Data Science and Engineering at Netflix, Inc., and served in senior data science roles at Yahoo!, Blue Martini Software, and Proxicom. Eric has a BA from San Francisco State University, an MS from Golden Gate University, and an MS in Management Science and Engineering from Stanford University.
This document is for general informational purposes only. This document does not constitute investment advice or any offer to provide investment advisory or investment management services. The information in this document should not be construed as any current or past endorsement, recommendation or sponsorship of any company or security by Goodwater Capital. This document does not constitute a solicitation, offer, opinion, or recommendation by Goodwater to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or other investment. At the time of issuance of this document, Goodwater did not hold any interest in the company discussed in this document. Please refer to our Terms of Use for more detailed information.
  1. SFIX S-1, at page 1.
  2. SFIX S-1, at page 68.
  3. SFIX S-1, at page 47.
  4. Source: Business of Fashion (https://www.businessoffashion.com/articles/news-analysis/stitch-fix-introduces-over-100-contemporary-brands)
  5. SFIX S-1, at page 79.
  6. SFIX S-1, at page 10.
  7. Source: Recode (https://www.recode.net/2017/3/20/14992626/stitch-fix-katrina-lake-code-commerce)
  8. SFIX S-1, at page 78.
  9. Source: Business of Fashion (https://www.businessoffashion.com/articles/fashion-tech/is-stitch-fix-the-goldilocks-of-fashion)
  10. SFIX S-1, at page 70.
  11. SFIX S-1, at page 68.
  12. SFIX S-1, at page 68.
  13. Source: Racked (https://www.racked.com/2016/1/29/10841422/luckyshops-glamour-redirect)
  14. Source: ZDNet (http://www.zdnet.com/article/q-a-how-rent-the-runway-dazzles-shoppers-with-data/)
  15. SFIX S-1, at page 47.
  16. Pitchbook.com
  17. Source: Recode (https://www.recode.net/2014/7/31/11629386/nordstrom-will-pay-350-million-for-trunk-club)
  18. Source: NY Times (https://mobile.nytimes.com/2014/07/31/business/nordstrom-buying-a-website-for-mens-wear.html)
  19. Source: USA Today (https://www.usatoday.com/story/tech/2015/08/17/liberty-interactive-acquires-zulily/31841741/)
  20. CapIQ
  21. Source: Fortune (http://fortune.com/2016/05/16/dollar-shave-club-2/)
  22. Source: Recode (https://www.recode.net/2016/7/19/12232698/dollar-shave-club-just-sold-for-1-billion-to-unilever)
  23. Source: Walmart (https://news.walmart.com/2016/08/08/walmart-agrees-to-acquire-jetcom-one-of-the-fastest-growing-e-commerce-companies-in-the-us)