A one-time darling of the "make everything digital" investment community, Stitch Fix (SFIX) stock is trading at about 10% of its 52-week high, set almost exactly a year ago.
That, along with rising prices, economic uncertainty, and lots of other vague things that sound better for a CEO to say than "our business model makes little sense" has put the company in a precarious position.
The digital clothing retailer has laid off 15% of its staff, which continues its slow and mostly steady decline.
Chief Executive Elizabeth Spaulding shared news of those layoffs with her employees, explaining in a letter to them (which was also posted on the company's website) why 330 salaried workers had lost their jobs.
In light of our recent business momentum and an uncertain macroeconomic environment, we’ve taken a renewed look at our business and what is required to build our future. While this was an incredibly difficult decision, it was one we needed to make to position ourselves for profitable growth. We are in the midst of a transformation and we know not every day or every moment will be easy. There will be tough choices along the way, and this is one of those.
That's sort of a non-answer and it misses the underlying problem with Stitch Fix.
Nick Otto for the Washington Post via Getty Images
Why Is Stitch Fix Stock a Bad Investment?
Stitch Fix sells clothes to people who care about how they look (or have to for work or personal reasons) and who don't like shopping for clothes.
The company has its customers take a style quiz and then some combination of human stylists and artificial intelligence picks out clothing to send them.
As a customer, you then have to try on the clothes, decide if you like any of them, and return the ones you don't like. That's a laborious process relatively few people would be willing to undergo.
And if the company's business did not thrive during the pandemic -- a period where clothing retailers closed their dressing rooms, making buying in-store as inconvenient as buying online -- it's hard to think the business will thrive in a normal operating environment.
Again, Stitch Fix has two customer bases: people who hate shopping but like to dress fashionably and people who are too busy to shop. Realistically, the company's target is largely women because even the least fashion-savvy man can buy a grey or navy-blue suit.
It's a Business, Not an Investment
Stitch Fix was a good idea for a small company that caters to this limited niche. It was never a smart investment because it's selling something few people want and capturing those people is expensive.
Customers who can afford a stylist will hire one and those who can't will shop at department stores with friends who know style better than they do. Stitch Fix was always an inconvenient semi-digital solution to a problem that few people have.
Spaulding laid out the problem in her letter, but she doesn't suggest that the core business idea is flawed.
"While we are in a challenging period, we know what we need to do to return to profitable growth. Going forward, we will continue to innovate our client experience and broaden our offering, and invest strategically in both technology and product," she wrote.
Since a CEO can't say that the core idea for the company is flawed, Spaulding is putting the best spin on its situation that she can. The reality, however, is that for Stitch Fix to succeed it needs to become something other than an AI-assisted mail-order clothing company.
That's a tall order and not a ride investors should be willing to go on.
