November 25, 2019

Stitch Fix

You've probably reviewed the Annual Report from Stitch Fix (click here).

Let me show you something: Here is pre-tax profit percentage for the past five years.
  • 2015 = 9.7%.
  • 2016 = 8.3%.
  • 2017 = 1.3% (company went public earlier in the year).
  • 2018 = 4.4%.
  • 2019 = 2.0%.
I don't have any inside information into how the company works, therefore what comes is speculation ... I see a Management Team that knew the relationship between marketing and profitability, leveraged it to perfection in the two years prior to becoming a publicly traded company ... the VC folks got paid handsomely, and since then? Either there is a ton of marketing and other investment (which is not translating to sales increases), or there is a merchandise productivity issue ... or both.

I've written favorably about Stitch Fix in the past, and a Twitter follower pointed out the disconnect between my criticism of profitability and my praise for their "data-driven" approach.

Here's what needs to be said.
  1. Data-Driven / Machine Learning / Personalization are important.
  2. The points in (1) are not nearly as important as merchandise strategy is.
  3. The points in (1) are not nearly as important as an appropriate new customer investment strategy is.
  4. The points in (1) are not nearly as important as pricing strategy is.
In 80% of my projects, one of three issues are identified as causing a business to struggle.
  1. New/Existing Merchandise Strategy.
  2. New Customer Strategy.
  3. Pricing Strategy.
When somebody tells you that Machine Learning is the secret to success in retail, realize that math / statistics / models / Machine Learning / AI can improve performance at the increment. However (2) (3) (4) above are SO MUCH MORE IMPORTANT, and ultimately dictate your profitability.

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