Stitch Fix fumbles IPO despite strong underlying business
Cruelty, thy name is Friday—at least for online clothing retailer Stick Fix Inc.
Shares of the San Francisco-based company started trading on Nasdaq Friday, and topped $ 18.53, well above the initial public offering price of $ 15. But investors trimmed the stock’s early gains and sent the stock to close at $ 15.15. After hours, Stitch Fix SFIX, +1.00% briefly traded at $ 14.99. The day’s trading was not exactly a textbook success, IPO experts said.
The traditional definition of a successful IPO is setting a smart price range and bumping it up after the roadshow, said Jenny Zhai co-founder and director of Nextstep Advisory Services, a firm that helps companies go public. Next, the company leaks the book is oversold, prices the stock at the top end of the range, and the stock pops on IPO day, she said. Stitch Fix didn’t check any of those boxes.
Stitch Fix declined to make executives available for this story.
Read: Stitch Fix IPO—5 things to know about online clothing service
While Zhai says the business is a good one, with a strong story and profits to match, the art of going public revolves around setting the right price for the stock. And in this case, there was disagreement between what Stitch Fix executives—and its advisers—and public investors thought about its value.
“When you first go to the market, you want to value the company in a way that people will want to buy it,” Zhai said in a telephone interview. “You want the stock to pop when it starts trading.”
Yet despite disappointing IPO, the online retail has a compelling business and strong financial statements, said head of technology research at GBH Insights Daniel Ives. He likes the name because executives essentially bootstrapped the company, and it has managed to grow the top line to close to $ 1 billion since its 2011 launch.
“It generates cash, unlike some other models that have come out recently,” he said, pointing to Blue Apron Holdings Inc. APRN, -1.30% as an example.
Revenue has climbed from $ 342.8 million in 2015 to $ 730.3 million in 2016 and grew to $ 977.1 million in 2017. But, the company is not consistently profitable. In 2014, it had a loss of $ 6.3 million. In 2015, the company had income of $ 20.9 million, and in 2016, income rose to $ 33.2 million. In 2017, the company lost $ 594,000. Repeat business is one of the company’s strengths and Stitch Fix says that of its 2.19 million active clients, 86% are repeat buyers in 2017.
Ives said Stitch Fix Chief Executive Katrina Lake is one of the rising stars in retail and part of the company’s secret sauce—that combats some of the difficulties brick-and-mortar retailers are facing—is the technology that behind the sales model. That tech gives the company deep insight into its customers and is one of the reasons why it retains so many repeat customers.
See also: Online clothing service Stitch Fix to sell 10 million shares at $ 18 to $ 20 a pop in IPO
To some extent Stitch Fix offers a unique competitive edge over competitors are retailers such as Nordstrom Inc. JWN, +2.23% and Amazon.com Inc. AMZN, -0.65% It’s tech and its subscription clothing service set it apart, Ives says, and it has made impressive penetration into retail in a short time.
But like any young company going public, it will, to some extent, battle the incumbent titans. “Amazon is lurking,” Ives said.