The Unraveling of Stitch Fix - The Journal. - WSJ Podcasts (2024)

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Kate Linebaugh: Our colleague, Laura Forman, writes about consumer tech, but her real obsession is fashion. She told me that her closet is literally exploding with clothes. So I asked if I could see it.

Laura Forman: Oh, God. Okay. Hold on. Ready? Are you ready?

Kate Linebaugh: Yeah, I'm ready.

Laura Forman: There it is. Are you ready for this?

Kate Linebaugh: Yeah.

Laura Forman: All right, here we go.

Kate Linebaugh: Oh my gosh.

Laura Forman: See the sweaters?

Kate Linebaugh: Okay.

Laura Forman: The sweaters are coming out. The shoes are cluttered and littered. There are boxes on the floor with stuff that didn't fit in the shelves. And it's a large closet. It's not a small closet, as you can attest.

Kate Linebaugh: So how often are you shopping? It's a big closet.

Laura Forman: Every day. Every day. Yeah. I mean, I have probably like 40 pairs of jeans.

Kate Linebaugh: Wow. I have three.

Laura Forman: You have three pairs of jeans?

Kate Linebaugh: Three, yeah. Yeah. And I just bought a third pair, so I used to have two.

Laura Forman: So I'm just going to move on from that because I don't even know how to respond.

Kate Linebaugh: Recently Laura's been following one fashion business closely, Stitch Fix, a company that brought a tech startup mindset to the women's clothing industry, claiming it would disrupt shopping with subscription boxes.

Laura Forman: It was for busy professionals, women who didn't like to shop, women who were interested in a better way to find clothing that fit. And it was a great business.

Kate Linebaugh: And how is it doing now?

Laura Forman: Now, I honestly, it's difficult to think of a company that's been doing worse, in the stock market, at least. Stitch Fix shares were down over 95% from their pandemic highs.

Kate Linebaugh: After its early success, Stitch Fix kept trying and trying to expand, but it didn't work. And now Stitch Fix is losing customers and is worth a fraction of what it once was.

Laura Forman: It's fascinating because it is the epitome of what the tech industry has become, and it's greatest pitfall, which is an industry that's trying to disrupt literally everything, even things that don't need disrupting, things that are working perfectly fine. And it's a company that decided that it needed to do everything for everyone, and that led to its implosion.

Kate Linebaugh: Welcome to The Journal, our show about money, business, and power. I'm Kate Linebaugh. It's Wednesday, January 25th.Coming up on the show, the unraveling of Stitch Fix and what it says about the tech industry. Laura is a columnist for the Wall Street Journal's Heard On The Street column, and she's been following Stitch Fix for years. Do you remember when you first heard about Stitch Fix?

Laura Forman: Yeah, I remember being upset by it, because I didn't understand why someone would not enjoy shopping for themselves. I should say in full disclosure that Stitch Fix was never going to be a company for me because I like to do my own shopping. I genuinely enjoy it, and it just brings me joy and calm and peace.

Kate Linebaugh: So essentially Stitch Fix is for a lazy shopper like me.

Laura Forman: Yes, people like you who had a job and knew they had to go to it, and that they probably couldn't wear the one pair of mom jeans that they've had for 25 years.

Kate Linebaugh: Ouch.

Laura Forman: Or their high school pair of jeans that they just hang onto for decades thinking they might fit in back into one day. Everyone does that.

Kate Linebaugh: Yeah.

Laura Forman: And you can't be bothered to shop, you don't like shopping, but you know you need to look a certain way.

Kate Linebaugh: The idea of Stitch Fix is to make shopping easier. When customers sign up, they answer a survey about their fashion sense and are paired with a stylist. That stylist picks out clothes for them and sends them a box every month or so, a fix. And, some people, they love it.

Speaker 3: I went ahead and tried out Stitch Fix, and I'm excited to see how it kind of goes. You in and you take a survey, kind of do style quizzes, let them know what-

Speaker 4: This box is a little bit different. I feel like we're seeing some different styles inside of this box. I'm really liking this super deep blue.

Speaker 5: I honestly feel like it's worth it, especially how cute it is and how comfortable it is. So this one, I am definitely keeping.

Kate Linebaugh: A company that sends a box of clothes in the mail doesn't necessarily scream tech company, but Stitch Fix' founder Katrina Lake positioned the company as having a Silicon Valley ethos with a drive to innovate. Here's Lake in 2018 on CNBC.

Katrina Lake: I think with Stitch Fix, we use data science and we use a lot of data science, but there's this important human layer of styling above it. And so as a stylist, when I'm styling fixes, I can see what the algorithm is recommending to me, but it's still my choice of what I'm going to choose and what I'm not going to choose.

Kate Linebaugh: The company promised to use data to disrupt shopping, starting first with women's clothes. And it worked. By 2015, almost a million customers had signed up to get their fix, but Laura says Stitch Fix wanted more than just the women's market. It wanted to disrupt retail for everyone. So in 2016, the company expanded into men's clothing.

Laura Forman: It worked well for women. And so they thought maybe this would work well for men. And when you think about it, initially you think, "Well, men hate to shop, but they still need to dress themselves, so maybe it'll work really well."

Kate Linebaugh: To sell men a subscription box of clothes, Stitch Fix had to invest a lot of money. And the company was optimistic. Here's Lake, the founder again, on Bloomberg.

Katrina Lake: We built a business in six months to be as big as the women's business was three years in. And so we've really created this platform, I think, that has all of these additional kind of vectors for growth. And we're at a place now where I think we can really focus on that.

Kate Linebaugh: And what happened with it?

Laura Forman: Men weren't interested. Some were, but they just weren't. Men don't like shopping, yes, that's true. But they also own one pair of pants, and they wear this pair of pants that makes them feel comfortable until it literally unravels. And they're lucky because unlike women who have to have kids and get periods and all of that, they can wear one pair of jeans forever. It fits them. So they don't have the need for this stylist to be picking out new jeans for them every season. They not only don't have that need, but they don't want it.

Kate Linebaugh: The men's fix wasn't selling well, but Stitch Fix didn't pull back.

Katrina Lake: Today is a really exciting milestone for Stitch Fix.

Kate Linebaugh: That's Lake, about to ring the bell at the NASDAQ Exchange, when Stitch Fix went public in 2017, at a valuation of about one and a half billion dollars.

Katrina Lake: It's a moment to reflect on the remarkable journey here, and also a moment to look to the future. Our dreams for Stitch Fix are big and bold, and we are just getting started.

Kate Linebaugh: Did it position itself as a tech company?

Laura Forman: Yes. It positioned itself as a tech company because they were applying data to the styling solution. And what I thought was funny about that was when I looked at their S-1, their initial public offering filing, 80% of their employees had absolutely nothing to do with data. They were either human stylists or they literally worked in fulfillment centers like shipping and packing.

Kate Linebaugh: As part of its IPO, Stitch Fix promised investors lots of growth. It was looking to expand internationally and into new product lines, like children's clothing.

Laura Forman: The thought with children also made sense, initially, because kids, they grow so quickly that they do need clothes all the time, as opposed to men who are fully grown. But then the other thing with kids, having three I can speak to this, is that my kids do get clothes all the time. They're called hand-me-downs and they're free.

Kate Linebaugh: All this expansion meant Stitch Fix was spending a lot of money. It had to hire more stylists and data scientists. It also had to buy more clothes because Stitch Fix owns its inventory.

Laura Forman: So they bought these warehouses and they filled them with fulfillment workers and they had to buy into inventory. Now, in retail, you buy into inventory one to multiple seasons in advance. So you have to make big bets on what people will be buying and how much of it people will buy. And if they don't pan out, then you're just left with a bunch of inventory. And then in the worst case, you have to close your fulfillment centers because they were just huge costs that weren't profitable.

Kate Linebaugh: Stitch Fix' sales growth was slowing down a lot, and it looked like the company would have to cut back on its efforts to expand. But then it got a second wind.That's coming up. The pandemic was boom times for e-commerce. Shopping malls and stores were closed and customers were forced online. Many found Stitch Fix, which in turn attracted a lot of investors.

Laura Forman: The pandemic happened and it was a lifeline. It was their saving grace. Suddenly, within a year, the market cap shot up to $11 billion.

Kate Linebaugh: Stitch Fix was worth $11 billion, about as much as Macy's at that time, and like other companies that had benefited from the pandemic like Peloton, Zillow, and Zoom, Stitch Fix decided to expand again.

Laura Forman: This is where the company started getting very excited and it opened this massive 700,000 square foot warehouse in Salt Lake City so that it could buy more clothing and ship more clothing and help more people.

Kate Linebaugh: But figuring out what those people wanted was really tricky in the pandemic, because fashion kept changing over and over.

Laura Forman: People stopped wearing work clothes because they didn't go to work. They wore sweatpants, but Stitch Fix had already bought into the work clothes. So then they pivoted into athleisure. And the problem is then stores opened up so people could shop again. And people started going back to work. So they needed work clothes again. But now they have this warehouse filled with athleisure that no one wants.

Kate Linebaugh: Then a lot of people started canceling their Stitch Fix subscriptions. From July 2021 to July 2022, the company lost almost 400,000 customers and it's stock started to slide.In August of 2021, founder Katrina Lake stepped down as CEO. Her replacement had another ambitious plan to grow the company. Stitch Fix would move beyond the fix, beyond its subscription box. It would open up an online store that anyone could access.

Laura Forman: You still have to take the quiz.

Kate Linebaugh: Okay.

Laura Forman: And when you go on, you don't just see all of their inventory like willy-nilly, like you might on Amazon. It will show you pics for you.

Kate Linebaugh: Basically, pivot away from boxes, keep the business, but start just being an e-commerce fashion platform.

Laura Forman: Right, but personalized. Stitch Fix would tell you that they simply broadened their horizons. They never stopped selling their boxes, their fixes, but they did open up their platform so that you, Kate, who had never used Stitch Fix' styling services before, could go on and shop for the clothes that you wanted, but a little bit more personalized.

Kate Linebaugh: So did this pivot payoff?

Laura Forman: No, it doesn't seem like it has. They literally gained clients every single year consecutively from 2014 to 2021. And then since then, 2022 and fiscal 2023, they've lost clients. So they opened up Stitch Fix to a la carte shopping as an attempt to acquire customers and all that's done is lost customers.

Kate Linebaugh: The company has said the economic environment has caused the decline in subscribers. Earlier this month, Lake returned as interim CEO and Stitch Fix laid off 20% of its salaried workers, and it said it would shut down that big warehouse in Salt Lake City just two years after it opened. Today, Stitch Fix is worth less than half a billion dollars, well below its peak two years ago. Even after its expansions, Laura says the data shows most of Stitch Fix' customers are the kind company started with.

Laura Forman: Today, data I've sourced shows that even years later with other categories, including childrens, kids, over three quarters of the business is still womens.

Kate Linebaugh: So what does this say about the idea that startups should be constantly disrupting and innovative and growing?

Laura Forman: Not everything needs to be disrupted. Things that have been similar or the same way for decades, if not longer, might be that way because that's what people like.The Stitch Fix story to me is interesting because it could happen and probably will happen to any tech company, to many tech companies. We're in a period now, exiting the pandemic, where so many online companies did so well and doubled, tripled, quadrupled their business, and now investors are expecting them to continue those growth trajectories. Well, to do that, they have to expand, but it also won't work out, for most of them. And it seems like every tech company wants to be everything to everyone. So for me, Stitch Fix is such an exemplary cautionary tale of that lesson.

Kate Linebaugh: That's all for today, Wednesday, January 25th. The Journal is a co-production of Gimlet and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.