Online personal shopping company Stitch Fix priced its initial public offering (IPO) below expectations in a downsized offering on Thursday, raising $120 million.
The underwhelming IPO highlights the challenges e-commerce companies face going public in the wake of poor performances from Snap and Blue Apron. It was also a disappointing debut for the newest breed of online shopping companies, which includes Warby Parker and Rent the Runway.
Stitch Fix priced 8 million shares at $15, below its indicated range of $18 and $20. The company had originally planned to sell 10 million shares in the offering.
The main concern for investors was its continued ability to stay profitable, according to a source familiar with the situation. That concern was exacerbated in the wake of troubles at Blue Apron and Snap. Both went public with losses on the promise of growth, only to see their stocks crater amid disappointing performance.
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, but many have struggled to balance those sales against the steep marketing costs they require.
In some cases, subscription box companies have to give away their products at a highly discounted cost. That model works best if customers buy other full-price goods a company offers. It does not work, as is often the case, if it faces steep competition and frequent product returns.
Stitch Fix had touted its ability so far to scale while focusing on profitability. However, recent earnings were hit by one-time items. In fiscal 2017, the company reported $61 million in earnings before interest, taxes, 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.
Going forward, it's expected to face even steeper challenges. The company 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.
"We're impressed with the fundamentals of the company. The issue is — what is happening going forward? The easiest customers they've already acquired. Now they have to spend more and more to acquire these new customers," Kathleen Smith, a principal at Renaissance Capital, told CNBC's "Closing Bell." Renaissance Capital manages IPO-focused exchange traded funds.