Retail

Stitch Fix files for IPO, testing investor appetite for online retailers

Key Points
  • Stitch Fix filed for its initial public offering.
  • The apparel subscription business faces competition from Amazon.
  • The company is estimated to be valued at $3 billion to $4 billion.
Stitch Fix to list shares at Nasdaq
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Stitch Fix to list shares at Nasdaq

Online personal shopping company Stitch Fix has filed for an initial public offering.

The IPO will be the first test of investor reception to the newest breed of online shopping companies. It is likely to be watched closely by its e-commerce peers such as Warby Parker and Rent the Runway.

The company did not state how much it expects to raise, but anticipates it will be valued at roughly $3 billion to $4 billion, sources familiar with the situation said.

Stitch Fix is a variant on the popular e-commerce "subscription box" model, in which customers pay to have regular — often monthly — shipments of goods. These models are popular because companies can predict revenue, though some have struggled to balance the steep marketing costs they require with profitability.

Stitch Fix, though, has focused on scaling its business with an eye to profitability. In fiscal 2017, the company reported $61 million in earnings before interest tax depreciation and amortization, down from $73 million in 2016. That was off $977 million in sales in 2017, up from $730 million the year prior.

Still, the business acknowledges that while it has largely been able to rely on word of mouth, it will need to pay more in the future to bring in new clients.

In its IPO, Stitch Fix will likely have to address questions over the last large consumer e-commerce company to go public, Blue Apron. The meal-kit company struggled with its offering, as investors balked over concerns around its profitability and the increased threat from Amazon in the wake of its acquisition of Whole Foods Market. It now has a market capitalization of $980 million, well below the $2.2 billion it fetched in its last private fundraising round two years ago.

Like Blue Apron, Stitch Fix can now include Amazon in its list of competitors. The giant announced in June the rollout of Prime Wardrobe. The service allows customers to order items such as shoes, clothes or accessories at no upfront charge, only paying for what they decide to keep. Shoppers have seven days to decide what they don't want.

Founded in 2011 by Harvard Business School graduate Katrina Lake, Stitch Fix touts a combination of data and stylists to select clothes for subscribers. Customers fill out a survey of their preferences based on size, budget and style. The company sends five personalized apparel and accessories items, which customers can either return or buy at a discount.

This personalized approach, says Stitch Fix, is what sets it apart from retailers.

"To be relevant today, retailers must find a way to connect with consumers on a personal level and fit conveniently into their lifestyles," it writes in the registration document.

Stitch Fix works with more than 250 women's fashion brands, including Joie and Citizens for Humanity, and more than 30 men's brands, including Scotch & Soda. It announced in August it is adding more brands into rotation, like Alice & Olivia, Helmut Lang and Kate Spade. It offers clothes for petite, maternity and plus-size categories.