Wall Street has long loved subscription businesses. From Costco to Netflix to Dollar Shave Club, the successful ones lock in customers who provide a steady, predictable stream of revenue
The latest subscription love interest is Stitch Fix, the fashion service that had its initial public offering in November. Investors were skeptical, partly because it came after Blue Apron , a meal-kit subscription service that has largely tanked, and partly because it wasn’t clear whether a subscription model could work for clothing. After all, do consumers really need constant wardrobe updates?
That might depend on which consumers you ask.
Stitch Fix has surprised investors, though, showing consistent growth. On June 7, 2018 it announced third-quarter earnings of 9 US cents a share, beating estimates of 3 cents, and revenue of USD 316.7 million, topping estimates of USD 307 million. That is 29 % sales growth, year over year.
The company also said it reached 2.7 million active customers, a 30 % increase from the same quarter last year. These results, coupled with the announcement that it is launching Stitch Fix Kids (“to give our littlest clients the freedom to express themselves”), sent the stock up sharply in after-hours trading.
Stitch Fix has leveraged social networks to grow really quickly, says Sucharita Kodali, an analyst at Forrester Research, but the question is whether they will be able to retain customers. According to Forrester, 70% of subscription customers churn within the first six months. That has been the downfall of Blue Apron, Birchbox, and others. Trunk Club, perhaps Stitch Fix’s nearest competitor, was acquired by Nordstrom in 2014 for USD 350 million, but Nordstrom wrote down USD 197 million of its value in 2016.
For now, Stitch Fix looks to be among the subscription-model successes. But, its real test will come in the next quarters as customers decide whether to stick around.