Yet Another Value Podcast - Felix Narhi discusses Stitch Fix $SFIX

Episode Date: October 20, 2021

Felix Narhi, CIO and Portfolio Manager at PenderFund, discusses his investment in Stitch Fix (SFIX). Key topics include what Stitch Fix's Act 2 looks like, why negative anecdata from first time users doesn't worry Felix, and what separates Stitch Fix from other online retailers.Felix's Q2 letter: https://www.penderfund.com/commentaries/the-managers-commentary-q2-2021-2/My SFIX tweet thread: https://twitter.com/AndrewRangeley/status/1450509121661308928?s=20Felix's Twitter: https://twitter.com/PenderFelixChapters0:00 Intro1:10 Stitch Fix Overview2:40 Addressing the negative anecdata6:30 What does SFIX's transition to Act 2 look like?9:10 Why is SFIX's data and data scientist focus an advantage?16:50 What would an Act 3 look like?19:35 Is it concerning Katrina Lake (the founder) stepped down as CEO?23:45 Discussing the stylist hours worked controversy31:30 Stitch Fix's inventory changes35:30 Will brands pull from Stitch Fix at some point in the future?41:15 Will Stitch Fix ever charge for the data they give brands?44:30 Why isn't Stitch Fix growing faster?49:50 Quantifying Stitch Fix's valuation54:20 Stitch Fix's private market and strategic value57:30 Does Stitch Fix need physical locations?

All right. Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Felix Nari. Felix is the CIO and a portfolio manager over at Pender Fund. Felix, how's it going? Great. Thanks for having me on. Hey, I'm excited to have you on. Let me start this podcast the same way to have your podcast. First, with a disclaimer to remind everyone that nothing on this podcast is investing advice. Felix has a position in the stock that we're going to mention today. So everybody should just know he's literally talking. in his own book, but, you know, please do your own work, do your own diligence. Nothing on here is investing advice. And then the second way I start the podcast is with the pitch for you, my guest. We first connected a couple weeks ago because I read your Q2 letter. I'll be sure to link to that in the show notes. And I just thought it was, it was so well written, so concise, so clearly thought out. And so I just reached out to you to say, hey, I really enjoyed this. And we started talking. And sure enough, when we started talking, we were really well, well spoken, concise, clear thinker. I knew right then you'd be a perfect podcast guest to have on.

I managed to wrangle you on, so I'm really excited for our conversation today. That all out the way, let's just go to the stock room and talk about. The company is Stitch Fix. The ticker is S-F-I-X, very popular on Finchwood and among value investors, but I'll just flip it over to you. What is Stitch Fix and why is it so popular? Yeah, well, Stitch Fix is a hyper-personalized apparel retailer that I think is in the process of revolutionizing online apparel and possibly other categories as well.

So the first start is apparel. So, you know, what really attracted us to the business model is a number of things. I mean, it was and still is to a certain extent founder led. We do tend to skew towards founder led companies because they tend to outperform over time. But we think the business model is actually quite interesting and unique in the sense that, you know, they use, you know, personalization data, really a data science kind of driven company to really understand their customers exceptionally well. And what that does is allows them to buy, you know, inventory. better, which pleases more customers, which, you know, makes working capital better,

less write downs, all this kind of stuff that, you know, drives, you know, working capital efficiencies and RICs. So ultimately, those kind of feedback loops, better and better data, improves the results. And it's really something that's quite unique, we think, especially in apparel retail, but there's not a lot of companies in our mind that are similar to stitch-fix with a similar runway with DC unit economics. I mean, ultimately, we think about like, you know, team, TAM, unit economics, and runway. And so, you know, if some of those are misperceived by the marketplace, that's sort of, you know, where we think there's opportunities for this pricing.

And I'm going to get into all of that. But let me start with the first question. The question I get most frequently the question, I've looked at Stitch Fix several times over the year, the question that always jumps out to me. I'll start with an anecdote. A few years ago, I was looking at Stitch Fix. So I got my wife a Stitch Fix. description. And, you know, five items get shipped. It's called a fix. Five items get shipped to your

house for those of you who haven't done one before. And I asked my wife, I was like, hey, what did you think of it after? And she said, this stuff was nice, but, you know, I kept one item because you bought it for me. And there's a $20 stylus fee if you return everything. So she kept one item, but she said, please don't get it for me again. You know, the stuff was nice, but it was too expensive. You know, I don't want to pay full price for these types of stuff. It just wasn't for me. And that's one, that's just one example. I never want to invest based on an anecdote, right? But on Twitter, you could even see, I shared some of my tweets online.

I shared them with you earlier, people, I'll put them in the show notes. But several of the responses were, hey, I like this story, huge TAM, lots of stuff. But every time I get one, it's kind of useless for me. So what would you say who people who look at that experience or have had that experience and just kind of shipped it back and it wasn't for them? How would you talk to them about this? Yeah, I think that's probably a fairly common hot take. Um, you know, I think part of this is just sort of the, um, sample size of one or a few antidotes

essentially. And so, um, you know, Stitch fix isn't for everybody. So if you can't kind of look at where they, you know, first started collecting their data. It was in the women's segment. And sort of, you know, if you think about how the engine works, the more you use it, the better data you have, et cetera, et cetera, better predictive analytics. And so they tend to have this demographic where they really do kind of, uh, the best sort of, there's a certain category of people where they do the best. And if you're kind of more on the outliers, they don't have a lot of data on you, it's just not going to, you know, provide you with the kind of results that you want. The second thing, you know, I remember when I first signed up to Netflix, I was kind of like humming and high and

like, I don't know, it's kind of old shows. There's not that much content. So to think that companies like this kind of stop here and don't keep on innovating, collecting more data and getting better is really kind of a static way of thinking. I mean, now none of us would dream to get rid of most of us are Netflix subscriptions. There's just so much value relative to what we're paying. And the same thing I think will happen over time as well. I mean, certainly this year, and we'll probably go ahead, get into it later. But I mean, they're adding way more brands, way more price points, you know,

way more categories of clothing, so not just the tops and bottoms. And so it's just going to appeal, you know, with different brands and different price points to a way larger audience than kind of where they've historically got that data. And so they're kind of not quite quite starting at zero because they still have the engine and they still have some data. But, you know, the ideal customer that will right away get stitch fixed probably wasn't your wife. But that doesn't mean that five years from now, or sooner even, maybe after this year, the next couple of years is the add-on these new freestyle features, essentially, that it wouldn't be for. And also, I'd say that, you know, only a small

percentage of people are really kind of love this kind of, like I call it like a box of chocolates, you know, essentially from what's that movie called? Forest Gump. Forest Gump, right? Like, not every likes to have a surprise, like a box of chocolates. There's a surprise on every once. Most people kind of want to lead me forward. So it's just, it's a very limited way to approach it.

But now they've got like a lot of muscle that they've gained over the years by honing their data science. And it's not just for merchandising. It's like logistics, like everything permeates data science in the organization. And I think that data muscle is hard to replicate. and increasingly it's going to become more apparent, I think, to more people as they go into this next act of the revolution. So I'm going to turn back to some of the barricades and stuff, but let's continue along that next act thing, because you said something interesting earlier in there.

You said, hey, I remember Netflix when it first launched and everybody was like, oh, the content isn't that great, and now nobody would cancel. And I thought it was really interesting. I believe it was the CEO in one of her recent interviews or something, said, look, we are at the Netflix as a DVD service stage. of our business right now, right? So right now, the core business is you get a stitch fix, a stylus sends you five items, you can keep what you want and what you don't, you send back.

And if you send them all back, $20 styling fee. And they say that is the Netflix DVD and they're in their transition to the Netflix giant that we know today, right, the Netflix streaming that has Squid Games, which is the most popular show in the world, which is so tense that I literally cannot watch it before I go to bed because I end up staying up half the night if I do. but that's not they're in that transition, right? So right now, their Netflix score, what does, you know, once they hit the Netflix streaming service,

what does that look like? What's the big bullcase that we're playing for here? Well, I mean, we're probably talking about Act 2, but there might be Act 3, but Act 2 first is just, you know, really, you know, providing that personalization engine into a more kind of traditional e-commerce experience and really no, there's very few companies that have got sort of, the data science kind of DNA, like everything that permeates in this company is about data science.

And I mean, talk about data science. I mean, there's, you know, there's mathematics and there's statistics. There's computer science as well, but there's also domain expertise, right? So, you know, even large companies don't necessarily focus all the data science on a certain domain the same way the Stitch Fix does. And the reality is, is that, you know, there's just huge enormous needs out there. And as more and more commerce moves online, It's just not a super-satisfactory factory experience.

I mean, you have different style aesthetics. You have different fit. Like, for example, a shirt might say medium or whatever, you try it on, but you're a little bit different in the shoulders and all this kind of stuff. And it just doesn't fit. And so to have, you know, all the aesthetics, occasions, colors, all that kind of stuff to really understand kind of the same way that Netflix does. Like, if you like this show, you'll probably like this show.

You're going to have essentially a personalized store. So it's like going to your store, and everything in the store fits you exactly, exactly your aesthetic and that you'd love to buy. And so that is just a way different curated experience than sort of like walk into a store and 99 of 100 things, is it your style, it doesn't fit, you're not interested in. And so I think that's just a way different world that we enter in and one that companies like Amazon just are not super well equipped to. I'm going to come back to the Act 3 that you mentioned a second, but just sticking with the data science, right? So one of the big arguments I've heard for Sitchfix is exactly what you said. How many companies in the world have, I think they have 100 data sciences on their team. 140 data science on their team whose core job is to look at, you know, fashion and consumer retail and analyze all that.

I believe it's my friend Mara Chbilly, who's a huge Stitchfix bowl. He did one on invest like the best. he did it. I think it was a business breakdown or whatever that was just absolutely fantastic. So people can go to listen to that. But, you know, when you said that one thing that just jumped to my mind was, okay, I get you, but I'm sure Amazon has plenty of data scientists. And Amazon has more, Amazon certainly has more data than anyone. Now, is it the same data as what Stitch Fix is generating? Probably not. But, you know, it just does strike me. If you're making a data science argument, you know, Walmart's got lots of data, Amazon's got lots

of data. If Stitchfix really hits it at the park at some point, they're going to start mining that. Or, you know, I was just thinking back to Nordstrom's. I'm just glancing at Nordstrom's 10K. They do $15 billion a year in sales. And of that, I think roughly $6 billion or $7 billion a year is digital. So maybe they don't have the data signs now, but they are, you know, two or three times the size of Stitchfix. So if they really wanted to, they could start hiring data science to build up that muscle. Now, saying a legacy company can go build up that muscle is famous last words of Nokia versus iPhone or something, right? But I'm just a little interested more in you diving into that data science mode and why you think Stitchfix is the one who can kind of like own

that if that makes sense. Yeah, I think that's a good question. I mean, you know, ultimately it's data science and also the data, right? And so what they do is they, you know, what Stitchfix does, which the Amazon's or Nordstroms don't do is collect all the small data, right? And so what they do is when you first sign up, you have, you know, a bunch of information that you see. sign up that provides your preferences, your size, your budget, and all this kind of stuff, frankly, data that Nordstrom and Amazon would love to have, essentially, to get your first fix, at least the traditional environment anyway. And then, you know, after that, you know, more data, because 80% of all clients provide some feedback. What did you like? Why didn't

you like it, all that kind of stuff? And then they have this style shuffle, which is basically gamifying all apparel. So basically you have this app, they show you a shirt. Did you like it? Did you like it? Did you not like it? You know, like or not like. And over time, they really get this sort of profile of you that, you know, consumers generally don't provide that to anybody else. And there's a lot of things like, I can't describe my style, but if you click on enough style shuffle, you're going to get a sense that this is kind of your aesthetic, essentially, right? And then, you know, then you combine it with a team that's totally dedicated to apparel and not to all these other things. So again, domain expertise. And, you know, I think one interesting book,

I don't know if you've read it, came out last year, Innovation Stack. So Jim McAleby. I don't think I read it. Nope. Yeah. So Jim McAulvey, who's the, the co-founder, the less known co-founder of Square, basically wrote this, in my opinion, a fabulous book called Innovation Stack. And what he looked at there is he's like, why is Square really the only company of size that basically attacked, that basically Amazon decided to attack their core market

when they were small and they survived. So basically when they provide the doggles for all the micro-mergence, essentially Amazon did the same thing. And he looks at a bunch of other case studies and other non-tech industries too. But his premise was, is that innovation stacks. In other words, Amazon can come in. If it was just one unique thing that squared it very differently, they could come and copy and they have like, because they're so good, they probably have an 80% chance of copying and crushing that competitor. But let's say if there's another innovation that's that comes after

that. Well, there's 80% times that plus this other innovation is 80% there. So basically, if you have enough innovation stacked on top of one another, it's 80 times 80. times 80 times 80 and then by the time you kind of get through all these different things that they have to do different by the way they're also interrelated they're not totally separate and independent it's super it's not impossible but it's super hard and if companies not laser focused on apparel and getting all that stuff done because you know they've got they got bigger markets to fry they probably do fine on apparel especially for people that want like you know bulky non fashionable stuff they probably do fine selling you know lots of things on there but just not

the personalized element so I So those are some of the things that I think. So personalized data, super focused on the domain of apparel, essentially. And then lastly, this idea of innovation stack, which if you look across companies that really succeed against large companies, you'll see that that tends to come out, this sort of principle of innovation on innovation and percentage-wise and how it's so hard for these large companies to talk properly. I just want to add two things to what you said. the whole time you were describing the innovator's dilemma, but the whole time you were

describing that, I was just thinking for years, people have said Netflix is going to get killed by Amazon giving the Amazon Prime Way for free YouTube, you name it, they were going to get killed. Which reminds me, they had the data, as you're saying. And I use Netflix particularly instead of something like Spotify, which I think the same applies to, because we had the Netflix analogy, but Netflix had the data. And Netflix thought of all these little things that, you know, you don't think of them, but they really make a difference for a consumer. So, you know, little things like the A, B, test the little images

when you're clicking through shows so that they get their shows higher click rates and all this other stuff that is, to this day, if you go on, I've tweeted about this before, go load up HBO Max. The experience sucks. Now, some of the shows are, some of the HBO shows are unbelievable. Luckily, they got good shows, right? Yeah. Or Disney, the same thing.

Disney, you know, they don't even have, you have to watch through all of the credits before it goes to the next show right now, right? And Netflix has it, as soon as the show's over, two seconds of credit, boom, next show loads up. It is such a bad experience to have to sit through three minutes of credits. I know I sound like a spoke consumer, three minutes of credits, but it's just those little things and they really do add up. And Netflix, because they're only thinking about Netflix has that, the only other thing I wanted to rewind back to the Stitch Fix, because I am a good podcast host, I went and signed

up for Stitch Fix and did the style fix or whatever it was today. And I will tell you, the first four things it showed, you know, it showed one thing. I said no, it showed one thing. I said yes, one thing I showed no. By the end of it, I think you go through about 20 images. The last eight images in a row, clearly it learned very quickly what I was into because the last eight images in the row, I was pretty much saying yes to everything. So just to show, you know, it works and it can work pretty quickly.

Now, if I was a great podcast, I would have done this a week ago, how to think shipped to my house and told you how the shipping experience was. But just as a little bit of an anecdote on how this thing can work. Yeah, I'll just add to that that Eric Colson, who founded essentially early days, the Stichick's algorithms team essentially, came from Netflix. And he was the man who created essentially the Netflix algorithms. But he thought that that was, you know, he felt that the challenge to actually come up with data that can actually surprise you in a box and you actually like it was a way more

interesting problem to solve than just what show are you going to watch next. So kind of the DNA of Stitch Fix and the people that he tracked it because he is one of the, you know, leading, you know, leaders essentially in data science attracted this fantastic team to Stitch Fix. So he's no longer there, but kind of the DNA of what he established there, there is a connection to Netflix because of that. And I'm interested. So you mentioned Act one, which we're currently kind of evolving from was they send you a human stylist picks out five items with the help of data, sends it to you, you keep or return, whatever. At two is probably go online. They've got this customized store that says, hey, Andrew, here's shirts that we think you would like based on

your history. You know, it'll show me much different shirts than it would show you. And it'll say, like, Andrew, you've got a little bit broader shoulders. So here's shirts that people with broad shoulder. We probably have the same shirts, I think, by the way, Andrews. That is true. But it'll be a customized store, but you didn't mention you think there's an act three. And I'm just curious, if we're dreaming real big, what do you think the act three looks like once they kind of get the personalized store in play? Well, dare to dream. Let's get through execution of this act two first. But ultimately, I don't think that Katrina thinks of the company necessarily as only apparel, right? So apparel is already a huge enormous market. There's a big enough market already in the two markets

that they've decided to address the US, UK world, all that kind of stuff. So let's dominate the world there. But, you know, ultimately, like, personalization, like, why does this end just with apparel? I mean, if you have this engine and data science team that understands so many aspects of curation, even developing new styles, maybe it can be, I don't know, accessories. Maybe you love, you know, leopard prints and you want to have a leopard print couch in your thing. And that's your style aesthetic, essentially, right? Like, who knows? I mean, it's really, you know, you know, I think ultimately personalization.

and curation is something that is desperately needed from online commerce and, you know, being there first and developing in a super hard category, right? Like ultimately, you know, getting apparel right, selling $7 billion of merchandise site unseen is because of data science, ultimately, is a much harder problem than recommending, well, you might like this show if you like that show, essentially. So there's a lot of, you know, I think organizational muscle that's been developed that, that doesn't stop at just apparel. But I mean, I think that is so large, you know, that's like a year 15 if they're successful. I guess if I could sum it up, it's basically,

hey, you know, everybody wants to own the consumer right now, right? And Stitch Fix, not only do they own the consumer, but they would have unbelievable data on what you as the consumer like. And they've got a huge data sciences team that's figured out ways to tease it out. So it won't just be selling you clothes, as you said. They'll say, hey, you like X, Y, Z. Well, you probably would like this movie, this game, this food item, this experience, whatever. And you know, you could just dream really big from there. But that's probably 20 years down the line. Okay, let me ask. So we talked about how we can dream big and we can go to the financials a little bit. But aside from the anecdote question I got, the second most frequent pushback that I think people get on Stitch Fix that I

personally had when I saw the news over the summer, Katrina Lake, it's Katrina Lake, the founder over the summer, now she was stepping down. Now she's still very involved with the company. She's the executive chairperson. She's got lots of initiatives. But she stepped down and the president who had been hired a year or two ago took over as CEO. And the first pushback that Bears would say that I had in my head was how many times do you have a founder who is at this, you know, still pretty small. It's about a $3 billion market cap company, $2 billion a year in sales company. How many times you have a founder stepped down from that company right before there's, you know, the real inflection that they've been building for that's going to take them from $3 billion to $20 billion or something.

I can't really think of any. And that's the most frequent pushback that I've kind of heard. Yeah. Well, maybe there's some instruction that we have. I mean, we started in 03 as a venture capital firm. And so, you know, we actually have a lot of DNA at Pender, you know, helping and watching companies grow. And the reality is, is that, you know, most founders don't end up being Mark Zuckerberg, right? They can, you know, there's a certain level that, you know, that offers can get to, but, you know, maybe they really love that entrepreneurial energy and that creating something from nothing.

They don't less like the next stage of, you know, scaling and a lot of the kind of bureaucracy that comes with that. And maybe they're not interested in it. Like, they may not have a skill set and they may not be interested in it. So often Katrina has talked about essentially like ambition level. And let's not forget, like, I mean, she was the youngest, I think there's a second one now, but she was the youngest ever person to have an IPO on NASDAQ when Stitch Fix went public in 2017. I mean, that's pretty incredible accomplishment, you know, between 2011 and 2017.

So it's not like she's lacking ambition, but, you know, I think ultimately she doesn't have sort of the drive that Elizabeth Spalding came in, essentially. And so a lot of this, you know, stuff that we're kind of seeing increasingly come out has actually been Elizabeth's initiatives when she came in and developed kind of this next stage in the background for the last year or so. So, you know, I think Katrina was thinking that this could be a bigger potential, but she said that, you know, she said in the past that she doesn't feel like she should lean into the ambition in the same way that Elizabeth can. And so I just think, you know, not all founders really want that kind of all-encompassing attention that would require something like that. And they may not have the skill and they may not have the interest. So when somebody comes along and has got kind of those parts of the leadership to take it to the next level, I mean, you know, I've got weaknesses, you've got weaknesses. I'm glad that I've got people on my team that can do things well that I can essentially.

And so, yeah, so we're not worried about it. We've seen this lots of times in the past. It's not necessarily a red flag. You know, I get it that, you know, and I catch myself sometimes too, like wishing the visionary founder would stay forever and never sell any stock and that kind of stuff. But really, that doesn't happen. And it doesn't even happen with, you know, most of the visionary founders as well. I saw one of the questions on your Twitter feed about, you know, why she's selling stock, et cetera. Well, Reed Hastings, I think we have to agree, is pretty vision.

led Netflix, you know, for huge success. But, I mean, he owns less than 20% of the stock that he did 15, 16 years ago. Jeff Bezos has sold off more than half his stock from 0, 4, 05 kind of thing. So it's not like she's gone, as you say. She still is the largest individual shareholder at Stitch Fix. She's still there. She has other passions. Maybe that's better kind of for entrepreneurial energy to help these new brands kind of evolve

with elevate. and maybe the scale, the next level scale, kind of make it into a true compounding company requires somebody else. And Elizabeth has already brought in some people to help with that from Amazon as well. Some of the scaling DNA that maybe isn't there at the beginning stages. Let me ask a question on Elizabeth in our ambition, because that created an interesting segue that kind of just popped in my mind. So over the summer, and you can describe this all you want, but over the summer, Stitchfix

announced some pretty controversial changes to their. to the way that they, I guess it's employed Silas, paid Silas. They basically said, you know, Silas used to have very flexible hours, and they changed it to kind of a requirement for 20-hour work weeks. I think the end result was they ended up firing about a third of the Silas, but you can correct me if I'm wrong in the numbers. Let me get the question out first. You know, I, as I was prepping for this podcast and reading all the interviews with Elizabeth,

even before that change was made, she was really leaning into how they needed the data, the algorithms, the automatic, you know, for Stitch Fix to hit where she wanted to go, for Stitch Fix to really scale, you know, very much in the same way as Amazon. You know, if you want something to work on Amazon, everything needs to run internally. It needs to scale infinitely, right? And so I guess my question is the Stitch Fix style has changed. You can go into all you want, but I almost saw it as evidence of Elizabeth has dreams for this thing to be a lot bigger than it is, right?

And if you've got dreams for that, unfortunately, you can't employ 50,000 stylists, if this is going to be, you know, a 10 or $20 billion company, it has to be, you can have some stylists, but it has to be a lot of data driven. So we can address the silas changes, but I also want to talk about, was the stylist changes kind of just an evidence of she's dreaming so big, she sees where she needs to go. And in much the same way all visionaries do, if you need to hit point B to go from point A to point C, you just hit point B instantly. Yeah, I think you're right. I mean, ultimately you can't scale a business if it's required as human capital in the same way that you can otherwise.

Same with the inventory models that they're talking about, which maybe we can get into later. So you can't scale quite at the same pace. So, yeah, I think there's an evolution. I mean, initially, you know, there is no data. And a lot of it is, you know, essentially training algorithms, you know, between the customer data, between all the feedback, between what the stylists do.

And so, you know, I think, you know, I don't think anything that Stitch Fix does is by accident. I mean, they're so data-driven. that they have basically, they do this thing called, you know, launch and learn, essentially. So they do all these little tests all over the place. And they wouldn't announce a big chain. I mean, they still might have been surprised because humans will surprise you. But I think that they kind of knew that the algorithm, especially for the core cases where they, you know, again, the category of their customers where they fit really well where they have a lot of data.

Increasingly, the stylists are less needed over time. And a lot of that can be done by automation, especially as they move into this fixed preview. So that's basically, instead of the, you know, life is like a box of chocolates. They send you like five chocolates. I hope you like some of them and send back with the ones you don't like. They show you 10 items and you basically become your own styles. Well, I guess I can look at 10 and, oh, you know what, I'll have these five instead of these other five. So that gives more data to feed into the system.

And all of a sudden, you remove that variable cost. And you're probably the most interested in, you know, what you're going to get. And you're going to most likely pick the ones that you like and least likely to return. So it just improves potential sales and, you know, like less returns and more keep rates by going to this avenue. So ever since they launched that, they initially launched the fixed preview in the UK business. Again, launch and learn. Try it in a smaller market first and see if it works. And it had phenomenal success.

And they've been launching that in the U.S. as well. And when they talk about, you know, average order value and keep rates, that's a, you know, a decent incremental boost. And so I think they looked at that data and just saw, you know, where the business is going. And then probably even with stylists, again, I don't know, they haven't released exactly, you know, how many stylists they've let go. So I've read the same thing as well. They're not public in that way about it. But, you know, I think we're all familiar with the Pareto principle. I mean, you know, like we all have to think that we're above average, but on average we're

average. And so within that, there's probably superstar stylists that, you know, are totally gung-ho and they want to work all the time. And there's some other people that, you know, it's very, it's great work because it's very flexible and all that kind of stuff. But as soon as you move more into this, you know, even lifestyle that they talk about, it becomes more for like serious stylists only. I'm sorry, but the, the model that we're going into isn't going to work on this flexible basis. And so maybe some of the best stylists didn't have as much work as they wanted. And some of the ones that had, you know, not as much work, essentially are best, you know, not to be there. And then they got, you know, $1,000, I think, payment to, you know, if they

don't want to stay with those hours. So how they handled it? I mean, I don't know. It's hard. When you're telling a big organization that's kind of built the DNA that the human component and styles is still the largest part of the organization that they're not going to have predictable reactions. I mean, I've read lots of blogs about angry stylists and all this, and I don't blame them. It's a very human reaction. But the business is fundamentally going someplace already, someplace quite different. And I think it's, I think like almost everything Stitch Fix does, it's data driven. So they know there's a high probability that this is going to work because they've already done it in other markets. And if the, you can correct me if I'm wrong

because, again, I signed up for a Stitch Fix this afternoon and haven't done it says, but I don't think you really develop an intense relationship with your stylist or anything, you know, like the gym I go to or Peloton. If Peloton fired Matt Wilper is my favorite actor. The Peloton bikes in my dang apartment, so I probably can't get rid of it. But that might be an issue, right? Like Peloton would really have to weigh that. I don't think if Stitch Fix fires Felix, my stylist, I'm probably not really going to care. And the end game is pleasing the customer growing sales. So I'm sure they had that data that it wasn't, it's not great to have bad people. I'm sure there's a little bit of internal summer old,

but I'm sure they had data that it said it wasn't really going to affect the customers. Yeah, I agree. I mean, even looking at, you know, I mean, sometimes there's so much, you know, personal connection between what the previous model was that maybe it's easier for Elizabeth to move on from the current, you know, very stylist-driven model than Katrina Lake, essentially, right? That was the ambition thing I was talking about earlier. Yes, exactly.

Yeah, we saw the same thing at, you know, Zillow, like a couple of years ago when Rich Barton stepped in is essentially, you know, prior, you know, Spencer, the previous CEO said, oh, we're never going to compete with you realtors. We're not going to get into like your business essentially. And so he had a lot of this connection with and not wanting to break his promise. I mean, that's kind of his promise. He had to leave for them to kind of go to the next level, essentially. Rich Barton, the founder came back. He's like, boom, I'm going to this hill. And, you know, I, you know, they had a bit of a hiccup recently.

but so far, so good. So sometimes the change in leadership allows them to have a clean break of what was to what will be. You know, I think, again, I've mentioned Mario, this will be the second time I've mentioned Mario on this podcast, but he said Reed Hastings is probably the most impressive CEO who's ever seen. And it just reminds me how, you know, just out on the right tail, Reed Hastings is where he starts with a DVD mail service and he transitions to a streaming service that's going to kill his original business. And then he re-transitions and, you know, does something that might and eventually did piss off all his suppliers where he said, hey, right now we're just kind of a

middleman and we're going to get into original program. And I mean, it's just unbelievable for one CEO to be able to do that. And as you said, most companies, you've kind of got to bring someone someone else in to make that switch. You did mention earlier that they're making some inventory changes. And as someone who just was really starting to dive into this for the first time in a while, I was a little confused and interested in those inventories changes. So I'll just also review, can talk about what the inventory changes are and how that kind of accelerates the business to the next level. Yeah. So, I mean, Stitch Fix has always been, had, you know, relatively limited, you know, inventory. And so a limited choice, essentially. And so, but one of the things that they

had from that, because they knew the customer as well, they bought very limited inventory, because they generally speaking knew much better what the consumers wanted. And they had very high, you know, capital returns. But one of the problems with that, of course, is that, you know, as much as you want curated stuff. You want curated stuff for you. So you still need to have a wider selection, right? Like your wife, for example, probably didn't like the particular selection they had. There's just no way from their inventory they could have satisfied it without more brands, price points. I don't know exactly what their style is. So really, you know, a couple things. So they have this, you know, 1P wholesale model essentially. And they're doing a couple of things. They are improving

the wholesale model. So they're expanding distribution capacity by quite a bit, not only more square footage, but automation and verticalizing, essentially, the warehouses to get more throughput, to make their fixed assets sweat. But what's probably even more exciting, in my opinion, is this, the work they're doing on, you know, consignment and drop ship inventory. So in other words, you know, a consignment, a brand retailer would, you know, basically send, you know, merchandise apparel to stitch fix, but, you know, they wouldn't get paid until it's sold, essentially, right? And so it's sort of this extra expanded choices for the consumer, but at no cost until it's sold, essentially. And so that's going to dramatically improve

the cash conversion cycle because they don't own this, just like 3P does for Amazon. And then as well as drop ship. So let's say there's a super hot trend. I mean, everybody won leisure, you know, after leisure wear, you know, during COVID essentially, right? Everyone wants squid games merchandise. Right, right. All of a sudden, there's a whole lot. hot trend. Maybe they don't have that in the warehouse because they bought that a couple months ago and they didn't know it's going to be a big hip, some factory or, you know, has that merchandise. If they could have a drop ship agreement with a vendor that has distribution capabilities, because I really want that squid or, you know, squid with this outfit or whatever,

and they could drop ship it. So again, that's another area where somebody else has got the inventory and that doesn't sit on Stitch Fixes balance sheet. So what it does is it dramatically opens up the choices, price points, brands, sizes, all that kind of stuff. But it's capital late. It doesn't add to the balance sheet. So it should not only increase business, but it proves the terms on unit economics essentially, which is a magical combination. Given their, given kind of their data and everything, is the end game for stitch fix eventually that they don't take any inventory risk? They're basically all third party, you know, maybe they've got stuff in their warehouse, but it's still owned by whatever clothing company or whatever made it,

and the clothing company bears all risk. Is that the end game for Stitch Fix? Well, it could be. I mean, I don't know about that. I mean, they also do have their in-house brands, essentially, their exclusives. And so, yeah, I mean, we'll see. I mean, I think that, you know, for the time being, I think a lot of the muscle that you develop, you know, to be a really good operator

requires owning inventory. It's sort of like, I mean, we've owned some restaurant companies in the past two. And the ones that have, you know, I know everybody likes capital light and 100% franchising model, but I do like companies that actually own and operate some of the restaurants to really understand what's going on and be customer-centric and understand how that operates essentially. So a bit of a tangent, but I think, you know, just like Amazon, I don't think he's going to give up their one-p business necessarily.

But the profit contribution incrementally from 3P is massive. And that's really what's fueling the stock. You mentioned that Stitch Fix is launching their own brands, which obviously they should, right? They've got great data in much the same way that Amazon should obviously launch their own products, right? When you see, hey, Product X is selling that crazy. We should just make a competitor knock their margins off. You know, Stitch Fix is going to launch in-house brands. I'm sure they're going to be great.

They've got lots of great data. They already have them, by the way. Yeah, yeah, they've got them. But over time, I'm sure they're going to be a big piece of the business. But that does, you know, get to the next question, which I get to. Stitch Fix, if you're a really nice clothing company, like, you know, even Under Armour or New Balance, most of them don't like to sell on Amazon because they're going to get undercut on price. It's not great on their brand, all this sort of stuff.

Lots of people have pitched. Brands love to sell on Stitch Fix because it is a non-discount way, right? It is high quality. It doesn't hurt your brand when you sell on there. You can sell on there full price. You get full margin, all that type of stuff, which makes tons of sense, but I'd have two pushbacks to that. The first is you see lots of companies that sell on. Amazon, eventually Amazon rips their product off, sells it for 10% under them, all that type of stuff.

So if I'm a brand, Stitch Fix, it comes down to Stitch Fix owns the customer. Stitch Fix owns the customer data. Most brands are trying to get into owning the customer. You know, Nike's pulling back on selling from a lot of third party places because they want people to go buy on Nike.com or buy in their stores and stuff so that they can have all that data. If I'm a brand and I'm selling to Stitch Fix, aren't I, A, regretful that I'm not getting that customer data and B, I'm pulling kind of when Disney sold all of their stuff to Netflix and I'm

kind of fueling the person who's going to eventually end up killing my business. Does that make sense? Yeah, I suppose that could be a thing. What would I say that? I mean, yeah, I think ultimately that could be an issue. But I mean, if you take a look at the last year, for example, the apparel market has shrunk, not online, but overall it's shrunk. So like, you know, ultimately brands need distributors and people to sell their brands to. And, you know, there's not that many brands that, or distribution channels that are growing. There's Amazon, obviously, there's Stitch Fix. So there's not a lot of, so increasingly as you, I mean, I think last year was one of the largest bankruptcy periods ever in brick and mortar apparel essentially. And so those kind

of places just, you know, don't exist anymore. So and, you know, it's better, maybe it's better the devil of stitch fix than Amazon essentially, right? Because there is a sort of DNA of, you know, working with brand partners. So one of the things they do is, is it, you know, not only is it a full price model, but they have low returns because, again, they on average, ship more to people that, you know, actually want them because they know what they want, essentially. And then the other aspect that they provide is data, essentially. So, you know, when a brand sells through, you know, Nordstrom or Amazon, they have no idea why, you know, what, was the reason why they bought it, why they returned it, why they didn't like it. They get way more

data. So, you know, for example, I think, you know, the average American woman is size 14 or larger, right? And so a lot of fashion brands, for example, didn't really even know how to approach this massive large opportunity because they didn't have the data. Nobody was talking to them about using massive for the average size of the American woman might be more choice of words on your but the opportunity is is is is large and um you know ultimately um they just didn't know how to approach this because they didn't have the data and you know last year um the plus size i think it was 51 percent it grew or maybe it was even more than that uh year over year and they're still like less than um you know half the size of the overall category of the women's category

So there's way more room to move, and they're working with, you know, brands to help them kind of address this market that they don't through their traditional high end or mid-tier kind of retailers. So, and just even sizes. Like sometimes people like, you know, I gave this medium shirt and it just doesn't sell it. There's a lot of returns. Why is that essentially, right? Well, they'll just say, well, you know, you said medium, but it turns out that actually the cut, you know, wasn't quite medium in these, you know, on the inseam or whatever, essentially. You use cotton instead of spandex, I don't know, I'm making up things. Cotton on medium is a little tighter than spandex or something.

That's probably all reversed, but yeah, absolutely. Totally. And it not only helps them sell more on the Stitch fix platform, but also everywhere else, right? Because they don't know why these things aren't selling because they have zero data. And so there is this sort of like, at this point, you know, definitely Stitch Fix is a platform that's growing, number one. And number two, there is a lot of learnings. they are much more brand-friendly than the vast majority of others. And if anything, they're expanding more to brands.

I know they've got exclusive brands, but it tends to be in areas that their existing brands can't fulfill or then essentials and basics right now anyway. So maybe in the future, you know, they'll get more into their own, you know, more specific as they get more stylish information, essentially. But I think they want to grow and expand with, because there's so much inventory out there that they can, you know, access with these new models that to go for exclusive brands at this point anymore probably is

the wrong thing to be chasing at least at this point of time. As someone who's spent 15 minutes on the Stitch Fix website, I was surprised by some of the brands that I did see on there. You know, it was a lot of name brands that have lots of distribution and, you know, I listed under armor and new balance, which it's not like they're super exclusive, but there were a lot of brands on there that are very well known that I was just surprised you on there. Let me ask two more questions on this sprint thing. A, right now, Stitch Fix is providing that feedback to brands for free, right? Like, hey, Under Armour, your size 12 running shoes that you sold to Andrew, it turns out

they're a little too small or that, you know, your large fits like a medium or something here, and they're just giving them that thing. Like, this is why your stuff is too high return. Eventually, do they start charging Under Armour for that type of feedback, right? So that improves their margins because they're giving the brand feed, very valuable feedback. And then for in return, Stitch Fix either gets cheaper clothing, you know, they get money for providing that. So that would be number one.

And the number two, if I just dreamed even bigger on that, there was this interesting quote that Elizabeth gave that said, we want to provide more value-ad services to these vendors in a recent interview. And there's more to that. But I do wonder, is the long run for Stitchfix? Eventually, you know, do I hear brands that are saying, hey, you know, Stitchfix powers is all of our analytics, stitch fix powers our store, all that. Eventually, do they become a consumer-focused retailer as well as a data analytics company

powering a bunch of other retailers? Well, that's possible. I mean, we talked a bit about Act 3. I'm like, let's not get too excited until the actual. Yeah, yeah, yeah. But, I mean, yeah, certainly, you know, I think it's possible that they could, you know, white label, become a white label analytics provider for big brands, essentially, right? So why wouldn't they?

I mean, we're all, you know, like I said, everybody's good at something and maybe the core analytics side is simply not something that, you know, most brands are going to do particularly well. And if they can get that at a cost-effective basis, you know, why wouldn't they consider that, right? So number one, it's really hard. Well, maybe in the future won't be, but right now it's hard to get quality data scientists. And most data sciences, it's kind of like, you know, back in the day, like if you're the top ranking MIT engineer, where are you going to go, some, you know, company that. nobody knows anything, some legacy company that's trying to get some capabilities, or you're going to go to the top firm, you know, in that domain that you like, essentially. So, you know, right now I think Stitch Fix is a draw for talent. And, you know, essentially, if companies want to outsource and, you know, get exposure to that, that talent and the data and, you know, all the reasons why, you know, they're able to, you know, personalize, you know, the apparel. I mean, I think that that's possible. But I just, I think that that's so far. are out. There's so much runway and kind of closer adjacencies. And I think it's really dangerous to get into adjacencies before you conquer the low-hanging fruit that's kind of sitting right in

front of you. Let's go back to the low-hanging fruit then. So the first thing I asked was eventually, you know, does Stitch Fix start charging brands for that feedback of, hey, your larges are fitting like a medium or your large is, you know, the blue color palette is off or something. I don't know. And right now they give them that for free when they're saying, here's why your stuff isn't selling, and here's why your stuff has high return rates. Eventually, does Stitch Fix either starts charging for that or do brands just give them a better deal on the stuff that they sell because they'll get that extra data from Stitch Fix?

Possibly both. Yeah, I don't really have an opinion on that. Okay, okay, that's perfect. That's perfect. I've got two more questions, and then I think we can kind of wrap this up or go anywhere else you want to talk about. One of the things when I look at Stitch Fix is, you know,

it pops to mind to me that this is a company until COVID, they grew 20% every year. They still grew very nicely through COVID. This year, they're guiding to greater than 15% growth. You know, all of that is fine. It's great. It sounds nice. But it just does strike me as given all the tailwinds here, all of the, you know, the shift to online, all that type of stuff, it's surprising to me that this company isn't growing faster

and hasn't grown faster in the recent past. So, you know, my question to you is, why shouldn't this be growing quicker and why shouldn't I, as an investor, look at this and not be disappointed by the growth? And I guess the more advanced question would be the fact that it isn't growing quicker, is that the sign of something that is some type of business model issue or something? Yeah. Well, kind of looking at the rear of the mirror a little bit. I mean, they, you know, they had decent growth, but you're right.

Like, you'd think that they would grow faster in COVID. But, you know, one of the things they did for better for worse. And again, I think this is, you know, sometimes you look for companies that do, you know, quality gestures. And one of the things that they did was they shut down three of their warehouses during COVID. So simply, you know, not having, what, three other seven warehouses open during, you know, a chunk of the COVID period and all the ramp up and all that kind of stuff. I mean, you're not going to be able to fulfill fixes if you don't have these. You said that was a quality gesture. Can you explain why that was a quality gesture?

Yeah. So, I mean, you know, one of the things that, you know, they sort of like. a cultural element of stitch fix is, you know, compassionate, be kind, like really, like the culture there is super important as far as kind of being a stitch fixer and allowing basically warehouse workers to, you know, not put themselves in danger, put the family in danger was really important. Like Katrina Lake, for example, I think in early April, you know, this is when the stock was down to like 11 bucks or whatever. She decided that she's not going to take her annual salary for the rest of the year and donated that part of her salary to all the workers

and relief programs essentially, right? And so, you know, I know that she's wealthy, but I mean, that was a scary time when your stock sinks from, I don't know, 35 bucks to 11 bucks, and we're all worried about it. And so I think some of these gestures that, you know, may cost something in the short term opportunities, you know, if you're building a strong company, are the right things to do. And again, you know, I think it's a quality gesture from a culture. built to last, not to extract every last profit. And we can sort of like, you know, the long-term runway by having it would be disgruntical that you took advantage of us during a really tough time. That's not going to land well, you know, when times are better again. So, so, so just

looking backwards, I think that was really, again, in an analog world, I mean, the companies that are in the digital world, that didn't impact them, right? But I mean, an analog world, when you have warehouses closed, that impacted them. And yeah, I mean, as far as the 50, percent. I mean, I don't know. I think that's highly conservative. You know, I think it's possibly a big time sandbagging. But, you know, I mean, they did, you know, at the end of last year, Ray's guidance, they got pretty excited about, you know, some of the initiatives. And it didn't quite, the world doesn't quite work out how you think it's going to work out. And they had to kind of eat crow for a little bit. And so, you know, I think, you know, I'm just speculating here,

but a couple of things are, you know, going on. One is that, you know, they don't want to disappoint again. So you provide like really sandbagging low guidance. It increases the odds. Are you going to surprise on the upside? Always under promise over deliver. Number two, Spalding.

I mean, this is her start fiscal year as the CEO. Usually you start from like, you know, a really low, you know, you don't want to jump into guidance and disappoint even more so when you first start jumping into the CEO's street.

And then, And yeah, just number three, I think, you know, I mean, we're still in a period of COVID. I know it seems like we're past COVID, but there's all kinds of second and third order impacts that we're still seeing because of COVID, even if we're on the, you know, past this, at least this last peak, which is all the supply chain issues. Yep. And so it doesn't matter. Like, you know, look at Zillow recently, right? Like, you know, if we can believe them, which I do, I mean, massive. massive demand, but they didn't have the operational ability to fulfill it, just like Stitchfix

would have had bigger demand, probably, but the warehouses were down. If you can't get supply because of an external factor, nothing to do with your plans and executing, but there's also external factors. If something all of some comes through, you know, again, you don't want to, you want to allow for those things, and that's a very reasonable allowance in this period. So, yeah, I think just conservatism, setting low benchmark, low, you know, to exceed it for a new CEO. And then third, you know, external factors, I think, are still much more uncertain now, given all the supply chain issues we're seeing across the country and the world, then they would have been in a normal period. So just building some allowance for that. I mean, and let me search my last question.

And this is just talking valuation. And I think you and I would just probably describe ourselves as value investors. because, you know, the way value investor has been defined has evolved a lot over time. But I don't think you and I are over here saying, we buy stocks because, you know, we're buying on momentum. We're hoping they become a meme stock. We're trying to buy stocks for less than their worth, right? So right now, stitch fixed, $33 per share share price.

The enterprise value is about $3.5 billion. They did $2.1 billion in sales in 2021. Obviously, that's growing. We hope it continues to grow pretty nicely. But when I just think about, you know, EBITDA is, it's EBITO positive, but, you know, it's not great. When I think about just the long-term model for this business, what is the margin look like? What is the valuation on kind of a run rate basis look like?

Obviously, there's the Act 2, Act 3, Act 7 stuff we talked about. But if I'm just thinking about it right now, what's the valuation kind of look like? Yeah, I mean, I think it gets tricky when you think about upside. So, you know, one thing that we think about as value investors, and again, you're right, like it's such a loaded term. I even hate saying value investing because people which is assumed low price to book and all that nonsense. Not so much anymore, but there's so people that expect that kind of stuff. But I mean, you know, ultimately we're looking to, you know, minimize downside risk, you know, catastrophic risk, right? So margin of safety stuff. So I, you know, first kind of, you know, we have a couple

different ways of how we slice and dice companies. So one of the things that we look at a lot, again, because of our venture routes, looking for exits is private market value. And so you know, when you look at stitch fix, their run rate, kind of the margins that, you know, if they decided to pull back, they've already demonstrated that the economics are fabulous. I mean, their initial fix, if they just stopped at that and, you know, they had returns on capital of over 100% on invested capital, essentially margins of 11% EBIT. So kind of if you think about kind of steady state, what is this business worth if they didn't expand? What's that worth? Well, you know, they probably generate close to 10% even margins.

on revenue, so what are they going to do 2.4, 2.5 next year, 250,000, $250 million, sorry. And today the, you know, you know, EB to sales, forward or something one and a half, I think, you know, you start working out with the metrics, like it's something like 14 times maybe even. I wish you could see my model because I, whenever I look at a growth company, I run a little steady state model. And I mean, it's not like this was hard to come up with, but that's literally the model that I have right now. Yeah. And then you look at the takeouts. So again, And the reality of takeouts is there's no companies that are exactly the same. So you can't just put a whole bunch of different companies on screen and say they're the same.

But I mean, there were some, you know, a number of acquisitions, especially pre-pandemic, that are somewhat similar online fashion, you know, trunk club, et cetera. And, you know, kind of the valuations were, you know, something like 1.8 times EV to sales, essentially. And if you've been paying attention, M&A has gone totally bananas. So if anything, that's conservative. If they decide to put this company today on the block and we want to sell it, you know, the economics, the data, the sales, the inherent earning power of this company is way better

than the vast majority of the comps that I've looked at essentially. And so you basically have a downside if they wanted to sell the company that should be, you know, reasonably higher than here. And then after that, then again, like what's the kind of just the fixed business? Then what's the compounding after that? Well, the compounding after that, I mean, obviously they have to get this freestyle, right? it will help a lot if they move to this inventory, new inventory model, because it will improve their cash conversion cycle. So again, that will ensure that free cash flow is

higher than net income and they'll be self-funded for a long period of time. And so that gets a bit tricky. But I mean, long term, if they're self-funded and you're growing at, you know, I don't know, 25% per year, maybe more again, if they don't have inventory in the balance sheet, that's not a constraint for growth. That's what the intrinsic value, whatever we come up should be compounding out. So I just think that the downside, you know, I'm very comfortable the downside here. I think it's a bit tricky when we're going into like $70, $80 a little bit. But, you know, if you can compound at 20, 25% for a long period of time, you can pay what looks like an outrageous multiple. And in hindsight, it will be intrinsically

mispriced. And especially, I mean, you mentioned growth of revenue and stuff. But again, we talked about all these little different call options they would have, and this is the great thing about owning a consumer or owning a customer, right? Like, when you own the customer, they transact with you frequently. You have their credit card data. You have all this, you have all this personal data on them. You can get a lot of different optionality areas, right? So they've got all that optionality there. You did mention M&A. I do think this would be an obvious private equity target where private equity would roll in, growth private equity. They roll in, they'd see the unit economics. they'd get a lot of data that you and I is public market ministers don't have, and they'd say

themselves, oh, God, we could do something really interesting. But from a strategic angle, it's an interesting company to think about who would buy them. So, you know, I could you see a Macy's buy them? Nordstrom bought trunk club, maybe. Amazon, I'm sure, would love to have them and have all this data and stuff, but, you know, both regulatory and culturally, I don't know if that would be an acquisition, but from a strategic angle or just Eminem general, who do you think would be a buyer of Stitchfitz? Yeah, I think it's probably more of an academics question because they're not for sale. They're not selling. Yeah, they have, you know, between Katrina and, you know, some of the original base shareholders, they have super voting shares. They're controlling this thing.

And they're like, they're super stoked about the future. So I don't think they're at least give it the, you know, the real college try, essentially. I didn't dive through the proxy. Does Katrina completely control it? Or does like, Bill Gurley, I know, is still on the board, I believe. Is it a group of all the original investors who kind of own all the super voting shares in my control it. Okay. So yeah, I'm sure, you know, I mean, who knows, but it would certainly be valuable for Amazon. I mean, Amazon has bought, you know, category leaders in the past. So I don't see, and they certainly have got the capital. I mean, this would be like, you know, lint in their pocket to make a big huge bid for this.

But again, I don't, you know, we want someone to whole foods and Amazon bought them. So we've seen category leaders being bought by them in the past. So, yeah, Who knows who do that, but you're right, like, you know, even through, you know, buying this platform initially and then rolling up some brands and understanding essentially, you know, analytics. I mean, it's just, I mean, there's so much possibility here if you do it right, because, again, you know, I think the core engine here is personalization, data science. And it sounds like, oh, I'll just hire data science team and I can do anything anybody else can do. But it's just not true. You need duration of data. You need the team.

You know, all these things are not easy to replicate. And many companies have tried. And, you know, increasingly on this personalization avenue, Stich Fix is putting more and more distance, but from the also runs. I mean, Trunk Club is basically worth nothing. I don't think it was a problem for, I don't know, $150 million a couple years ago.

That's right. Yep. It totally failed. And it's not totally surprising. kind of legacy companies that buy, you know, somebody to try to catch up. I mean, it quite often ends in failure because of cultural issues or whatever. Founders leave, all the people that made it hop leave as soon as their non-competes are over. And so I think it's tricky from that perspective. Let me ask one last small question. And then I'll give you final thoughts.

Stitch Fix, they have said we don't own retail stores. We don't have, like, they own their distribution centers, obviously, but they don't have consumer-facing physical presences. And I just think that's interesting because all of us know about the clicks-to-bricks phenomenon, right? We're an online-only brand, a Warre Parker, a Bonobos and all these guys, see great early success online-only, and then all of them realize over time, hey, having a physical location is a great ROI. Not only are we going to sell stuff through it, it's going to build our brand. We can start doing some interesting buy online, pick-up in store, returns, all of this type of stuff. Stitchfix hasn't gone that route yet. Do you think Stitchfix needs to go into physical

locations at some point? I don't think so. I mean, there's so focused on working capital efficiency. It would basically torpedo one of the major damages of the business model, essentially, right? And so it's possible. But I mean,

I always, when I look at companies, I try to think about, you know, the DNA. I mean, one of the DNA is also that I quite like that's unique about Stitch Fix is the fact that,

you know, nobody would, you know, give Katrina money at the beginning. Like she, yeah, go a door to, a door and like, you know, she raised like a minimal amount of capital compared to a lot

of other people and basically out of necessity had to actually really focus on a unit economics. And so that was built in really, you know, you know, at the beginning level. I think I saw a tweet from Paul Graham talked about, you know, the capital you raise that you don't need become the expenses that you don't want in the future essentially, right? You try to fix everything with, you know, through money and not just rework discovered that doesn't work, right? So I think, you know, the DNA of the company, frugal, work in capital efficiency, all this kind of stuff. It would be really culturally difficult, I think, to go down that route. But, hey, anything's possible. I mean, if the world goes that way and that's, and maybe the

economics change over time, like, I don't know what the cost is going to be and how the models are going to change. I mean, you know, I wouldn't have guessed that, you know, 10 years ago that a company would exist that sells $7 billion with a closed site unseen. I mean, that seems absurd. That's not going to happen. Well, here we are. And so there's a way more things that are going to happen in the future that I think are practically impossible and kind of crazy. And so, yeah, I don't think that, you know, at this point anyway, I don't see that that makes sense for the model on the company D&A. I don't disagree. It's just interesting because basically every online company has moved into physical. You know, Amazon's got the go stores.

They bought Whole Foods. I mentioned the bonobas and stuff. And it is interesting, Sitchfix, whose whole thing is you get a hyper-personalized store online. They don't have any retail. But if they ever did retail, how do you do the hyper-personalized store in person? It's just kind of a fun thought. And I agree with you. I was just thinking. Maybe they have a styling near, right? You go to a store, a style in there. It takes pictures of you and you can get like, dressed up in some styles that they have. Who knows, right? Maybe that's the thing. And it can be great for their launching more private label of their own brand. You know, you go in and the only thing they're focusing is the private labels, which are going to be higher margin. It's going to encourage

customers. So you could see ways. It certainly could be interesting. And knowing them, they probably have sensors all over where everything you picked up and touched, they'd be analyzing it and they'd be using it to determine other stuff. This was great, Felix. I always want to give my guest the last thought. I mean, I think we covered so much here, but is there anything lingering that you want to leave guests with that you wish we had talked about, that we talked about a little bit, You wish we had talked about more? No, I think it was pretty, pretty full discussion. I mean, I, you know, I do think that, you know, ultimately this is a pretty big pivot for the company.

You know, when we think about companies like this, again, it's team, Tam, unit economics and runway. And kind of think of a variant view for, you know, all four of those dimensions essentially. And so there's definitely like, you know, team there we talked about, there's doubt like Spalding and founder and all this kind of stuff. The very view, this might actually be, this might be better. The TAM aspect, well, they're just in U.S., UK, the TAM is way larger globally. They're not even in all the categories. It's going to be way larger than most people expect. It's not stuck at fix.

Runway relates to that in addition to just all the other Act 3 possibly in personalization. And the unit economics, again, if you strip it down to the core and look at the working capital efficiency, how much capital they need to have in the business, kind of steady state economics. I mean, this is a very high. returning business that has, you know, pretty high barriers to entry. Like, this is not replicable kind of because of the innovation stack reasons. And so, you know, I think it's really interesting, especially because, I mean, if I was just looking at the financials and listening to the calls and thinking about the business and I didn't

see the stock price, I'd be like so super stoked right now. The stock price is like so different. So if you're wired to your emotions by stock price, I think that you'd see a way different picture And then if you didn't look at that at all, because this is, you know, I think very interesting. Nothing's guaranteed. You know, we don't do sure thing taking. We do risk taking. But again, we think the downside risk is pretty low here with, you know, again, private market value and just steady state.

But the best is yet to come. They're just building on aquaunt advantages. You know, you hear this with a lot of companies, but people will say, oh, it's in the public markets. And if it was in the private markets, it'd be this unicorn and everybody would be so jazzed about funding it. And Stitch Fix is one of those where. you know, given the name recognition and everything, it's in the public markets. And I do wonder in the private markets, if it, you know, we'd be hearing, oh, Stitch Fix just raised another round, $10 billion valuation, you know, everyone was just

tripping over themselves to get it and everything. I don't know, but it is something that does. No, you're right, actually. My business partner, Maria Pichella, she complains about that in private markets all the time. Like the valuations are totally insane in private markets. I mean, you have, you know, you have the tigers of the world and soft banks of the world, basically like signing checks, you know, without even doing much due diligence, they probably do,

but her impression is like, it's just a totally different world. And gosh, and in private hands, at least momentary valuation will be higher. But again, we're not in there for momentary valuation. We want to see the business compound and be a little value over time. And the whole spike we saw the spring, which was related to the meme stocks. I mean, you know, that's, you know, I mean, we traded around that a bit. We loaded a bunch because it was just totally, didn't make. and it had nothing to do with the business essentially. So there's trading opportunities, but that's really bad because there is, you know, I do believe in reflexivity. So, you know, if there's stocks that are flying for no reason, it, you know, impacts company morale, people's

perceptions, all this kind of stuff because that's just how human nature works. The worst one is go look at Bed Bath and Beyond, right? I was reading their investor day and I tweeted this out. They had an accelerated stock repurchase. They ended up because, you know, meme traders drove their stock up, they were forced to buy shares a lot higher than they would have had to. And they bought hundreds of million shares. Now they also got more aggressive on their own buying shares. But they bought tons of shares in the mid to high 20s. And now the stock is in the low 14s and they kind of spent all their powder. And part of that is on them. But part of that is they had the ASR out and people drove their shares higher. And I, Ruth, you know, just people think these meme

stocks and things don't matter. But if you're an employee in the company, I, I know for a fact, if your stock goes from 80 to 50, you get some employees who are saying, what's going on, even if it went 20 to 80 to 50, right? It's just, it's human nature and especially for employees who aren't extremely sophisticated in stock market. Anyway, I didn't mean to hop on a soapbox there, but Felix, look, it's been so great getting to know you. I really appreciate you coming on.

This was great. And I know you've got a lot of other interesting things, you're interesting things you're researching and investing in. So we're just going to have you on again. All right. Well, thanks so much for having me. I appreciate it. Oh, and I'll, you know, Felix's Q2 letter, which I mentioned all the way at the beginning

show, links in the show note. Felix's Twitter account will be linking to the show note. So if you want to find him, it'll be easy to find him. But Felix, thanks for coming on and we'll chat soon. Cheers.