What Happened to Stitch Fix? Part 2: More Than A Bold Bet
Stitch Fix is getting a new CEO and a grand new ambition. In the process, it is also losing the discipline its founder instilled.
This is part 2 in What Happened To Stitch Fix; you can find part 1 here:
Jeff Bezos, when asked about the failure of Amazon’s Fire Phone, articulated well how companies should think about bold bets:
It’s incredibly hard to get people to take bold bets, and you need to encourage that. And if you’re gonna take bold bets, they’re gonna be experiments. And if they’re experiments, you don’t know ahead of time whether they’re gonna work.
Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work. So, you know, AWS, Kindle, Amazon Prime, our 3rd party seller business – all of those things are examples of bold bets that did work, and they pay for a lot of experiments.
I’ve made billions of dollars of failures at amazon.com [...] but they don’t matter. What really matters is companies that don’t continue to experiment, companies that don’t embrace failure, they eventually get in a desperate position where the only thing they can do is a Hail Mary bet at the very end of their corporate existence. Whereas companies that are making bets all along, even big bets, but not ‘bet the company’ bets. I don’t believe in ‘bet the company’ bets. That’s when you’re desperate, and that’s the last thing you can do.
The tragedy of Stitch Fix is that it made a bet-the-company bet, even though the core business was thriving. It wasn’t anywhere near a desperate position. But I’m getting ahead of myself.
Changing of the Guard
The shocking moment came in April 2021: Katrina Lake announced she would step down as CEO of the company she had started only ten years earlier. Just four months before the announcement, appearing on the 20VC podcast, the host asked how far along Lake was in implementing her vision – “Is it ten percent, is it ninety percent?” Lake replied, “I don’t even know that we’re at ten percent.”
If you’ve read my previous post (which you should! What Happened To Stitch Fix? Part 1), you may recall that Stitch Fix was accelerating its growth during the pandemic, whereas brick-and-mortar retailers were struggling. It seemed as if Stitch Fix could transform into a personalized shopping marketplace. The Netflix of Shopping. With legacy brick-and-mortar retailers going the way of Blockbuster.
Considering how well the company was doing, it’s unusual for a founder to leave their life’s work after a single decade. Let alone one who believed they were less than 10% into implementing their vision. Founders in similar situations usually stick around for a second, sometimes even a third decade1. The abrupt transition seemed puzzling.
The company named Elizabeth Spaulding, who had joined just 15 months earlier, as its new CEO. The leadership change marked a strategic shift: going all-in on the direct-buy programs Spaulding had been hired to run. In hindsight, it also meant abandoning the Lake-era guardrails that balanced growth against profitability, and kept a close watch on unit economics.
Spaulding moved quickly to implement the personalized-marketplace vision. On her first earnings call as CEO – in September 2021 – she laid out her plan, beginning with a new name and high expectations for the direct-buy channel:
[...] this period [the 18 months since COVID started] has been a galvanizing moment for Stitch Fix. As consumers adapted, we intentionally and successfully captured an outsized piece of the disrupted apparel market by leveraging new product innovations, evolving our assortment and using our personalized experience to migrate more clients into our ecosystem.
Most notable in our evolution is our expansion into personalized direct purchases for our clients. Formerly known as Shop and what we have often referred to as direct buy, we have now branded this channel, Stitch Fix Freestyle. Going forward, we’ll refer to Freestyle when referencing our direct buy experience. It’s a change that reflects the philosophy driving this product. Clients have agency, flexibility and choice while also experiencing a highly personalized shopping experience.
We’ve achieved numerous milestones in building this 0 to 1 product at Freestyle over the last year. In fiscal year ‘21, we’ve grown top line net revenue for Freestyle more than 100%, reaching almost 30% penetration of our women’s client base. [...] early indications are that Freestyle is meaningfully accretive to revenue per active client metrics, which reached an all-time high in Q4.
Freestyle – the new brand name for the Stitch Fix direct channel, sales made outside of the five-item Fix boxes – was only showing early indications of success within existing clients; yet Spaulding was moving forward.
The Freestyle Bet
Then came a line that symbolized how much Stitch Fix has changed:
Recently, we’ve opened up Freestyle to new-to-Stitch-Fix customers, unlocking the channel to marketplace and marking the beginning of a tremendous opportunity for our business.
Less than two months into her tenure as CEO, Spaulding opened Freestyle to brand-new customers, customers Stitch Fix had never served and had no data on. It set the pattern for what was to come: bold moves and speedy rollouts, without the thorough testing and tuning that defined the Lake era.
Spaulding expanded on her plans, describing a huge TAM for Stitch Fix: the entire women’s apparel market.
Our vision is to become the global destination for personalized shopping, styling and inspiration, supporting clients across all categories and occasions.
[...] We are now expanding into a broader range of brands and price points as well as investing further in product categories where we are seeing promising success through Freestyle and Fix Preview, namely footwear, dresses, outerwear, accessories and sleep and loungewear. These product categories represent $90 billion in the U.S. women’s market alone and we have already started to see higher growth rates in categories like dresses through our Freestyle experience relative to Fixes.
Spaulding didn’t just open Freestyle to new customers; she put it at the center of the company’s strategy and was already expanding it into new categories and brands. Stitch Fix also announced a new marketing campaign to build brand awareness for a product that was still unproven.
An analyst asked for results: how was the public launch going, how was the new-customer marketing performing versus their old playbook? “No data to share yet,” Spaulding replied, “but I think early momentum we’re really pleased with.” They were turning on a brand campaign that week.
Such was the new Stitch Fix. For all the ambition, Freestyle was still presented as additive to the Fix business – a way to expand into new categories – not a replacement. That distinction collapsed within one quarter.
Betting the Company
Stitch Fix reported alarming news for the quarter ended in October 2021. It was already scaling back marketing spend, a sign that Freestyle was being rolled out too soon. “We are in a major learning phase,” Spaulding explained. This was one quarter after Freestyle was made available to brand-new customers, which raises the question of why the company had been in such a hurry to do so.
That wasn’t, however, the big issue; plenty of successful companies have shrugged off premature product launches — including Amazon’s Fire Phone, the very flop Bezos was addressing at the top of this post.
The bigger issue was that in racing Freestyle out the door, Stitch Fix was beginning to hurt its core Fix business.
For the quarter, Stitch Fix only added 15,000 net new clients, the lowest number – outside of the March 2020 quarter – in its reported history.
The company also slashed its growth outlook, from “at least 15% YoY” just three months earlier, to “year-over-year net revenue growth at a high single-digit rate”. This was hard to square with the ambitious vision – addressing the entire apparel market – the new CEO had presented only three months prior.
Spaulding attributed the deceleration to what she called “short-term cannibalization.” Pressed by an analyst, she explained:
We’re kind of introducing a little bit of paradox of choice. And for some of our clients, they probably are very high intent that just want a Fix. And I think we acknowledge in the onboarding, we may be distracting some of those clients with shopping in Freestyle when in reality, they just want the support of a stylist. So that’s an area of one opportunity and we’ve already made some adjustments on that.
Stitch Fix was diverting top-of-funnel prospective customers to the Freestyle onboarding flow – which hadn’t been tested or optimized – at the expense of the mature Fix onboarding flow, which used to convert users at higher rates. For now, though, Spaulding insisted that retention at the core Fix business remained healthy. The damage was limited to growth channels – new users hitting the Stitch Fix website for the first time – and was “temporary.” Adjustments were already being made, Spaulding assured on the earnings call.
And yet, things grew worse in the following quarter, which ended in January 2022: the company’s active clients declined by 161,000, dropping by 4% within a single quarter. Spaulding insisted that Stitch Fix remained “confident we are taking the right steps to become the global leader in personalized styling and shopping,” yet conceded that “in our efforts to launch and promote Freestyle, we chose to direct visitors coming to stitchfix.com towards the Freestyle experience [...] in leading clients to the Freestyle experience first, we inadvertently created friction for those seeking a Fix.”
This no longer seemed like a short-term mishap, though Spaulding again assured that “in an effort to mitigate this friction, we are beginning to direct stitchfix.com traffic to a clear and easy fix onboarding path. We expect this to boost new Fix client conversion over time.” Interestingly enough, she made similar guarantees one quarter earlier.
One more quarter passed, and Stitch Fix – less than a year into both Spaulding’s tenure and the major Freestyle pivot – reported a YoY decline in revenue, for its April 2022 quarter. The first in its history. The company also announced layoffs and warehouse downsizing.
While the iOS privacy changes and the overall macro weakness hit the entire e-commerce industry in 2022, Stitch Fix walked into the storm with another, self-inflicted headwind working against its core growth channel.
As it turned out, the damage to the core Fix business wasn’t limited to new-user acquisition. Thread by thread, the elements that made the Fix unique and successful were being dismantled, in service of the Freestyle vision. Freestyle was turning into – as Bezos described it – a bet-the-company bet.
Stitch Fix was letting go of the bird it had in its hand, hoping to catch two in the bush. We’ll dive deeper into this tragic process in the next post. Subscribe here for it to land directly in your mailbox:
Not financial advice. This post is for educational and general purposes only and should not be relied upon for investment decisions.
Of course, those long-tenured founders are also usually males. Katrina Lake explained in an interview: “I do think there is an older model of CEOs and leadership that is more about ego and less about a sense of purpose and servant leadership,” says Lake, musing on whether or not she thinks the average male founder would choose to forfeit some power if they thought it was in the best interest of the company. “In that old model, I think it was a lot harder to pass the baton and let go of the reins for fear of looking weak (or whatever). As employees are looking to a different type of leadership, I hope that ego-centric motivations are lessening.”
The story thus far is very reminiscent of Ron Johnson's tenure at JCPenney. Why did Lake leave in the first place?
מעניין, תודה.
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