“In some ways we can look like a retailer, in other ways we look more like a technology company.”

Editor’s note: The following is an unedited transcript from the 2018 Code Conference. It may have spelling or grammatical errors that will be corrected at a later date.

Jason Del Rey: Good morning everyone, so a lot of what I do day-to-day is cover a company you all know well, which is Amazon, and Amazon’s obviously dominant when it comes to one main type of commerce, which is I know what I want, I go and I search it in a search box, and I get it delivered to me very quickly. But in an eCommerce world, there’s still not a lot of companies that have nailed the idea of serendipity or discovery shopping, the kind of shopping a lot of people still do in the physical world. One company that’s probably made more strides than most in this way is Stitch Fix, so I’m very excited today to have Founder and CEO of Stitch Fix, Karina Lake, join me on stage.

I know we have a audience here, tech and media folks, everyone who knows Stitch Fix, but maybe a small percentage who get confused about how it exactly works if they haven’t tried it yet, and you can try to convert them later. Sometimes you get compared to subscription companies, get compared to traditional retail, give me the 30 second explanation so some people in the room aren’t confused of how the model works.

Katrina Lake: I think at the core of what we’re trying to do is to take this element of personal shopping that used to be available to a very high end customer, of somebody who knows you really well who can make selections on your behalf and have you try things on and make that accessible. How that actually ends up coming to life creates an eCommerce experience that’s dramatically different than anything else out there, and so at Stitch Fix, you let us know a little bit about yourself and then we will have a stylist with the help of some tools send things directly to your home. That is like showing up at Netflix and Netflix just starts rolling exactly what you want to watch. Or it is like sitting at home and having … going into a restaurant, and the restaurant doesn’t give you a menu and just brings you food.

It is this very hard problem of solving. What is it that somebody wants, and then actually properly delivering it rather than putting the burden of search on the customer. And so your intro was a good one, because I think fundamentally what I find is that what people really want is they want jeans that fit, or a shirt that looks good or a dress to wear to a wedding. The part of the shopping experience they don’t want is sifting through literally millions of things that you can filter and sort through online. And so we thing that we use experts and data science combined to be able to take that burden of discovery out of the consumers’ hands and to be able to ultimately deliver them with what they really want, which is the clothes that make them feel their best.

We’re going to jump into a lot of how the model works today, what it might look like in the future, also my personal experience with it. I’m sure you’re excited about that. But the last time I interviewed on stage was a little over a year ago before a big business milestone, which was your IPO in November of this past year. We’ve seen in technology over the last few years, a lot of companies stay private as long as they could. You had a company that was pretty much profitable, able to grow to almost a billion in revenue on just $40 million dollars in venture capital. You were coming out after Blue Apron IPO, which while completely different business in many ways, some investors lumped you guys together. And then you had an IPO day where maybe your price at IPO wasn’t what you had hoped for. Why did you make the choice with such a sustainable business that you had to go public when you did?

Yeah, I mean it was definitely a choice for us, to your point, we were profitable, so we didn’t need the capital at that exact time, but the business, we had always run it in a very fiscally responsible way. To your point, we’ve been profitable since 2014. Now it’s over a billion dollars in revenue, and it was created from $42 million I think of venture investment. And so I think we always knew that this was a path that would be available to us, and while we absolutely were disappointed with the price that as on the day of, I think to be able to have a long-term lens of … the best way for us to be able to create a lot of value over a long period of time was to have a public event. Would it have been better to do it four months later or four months before? Maybe. But I think at the end of the day, it was the right thing for the company, and I think the company’s ready for it. We’ve been in the process of proving it.

I think we’ve now posted I think three or four consecutive quarters of being in this 20 to 25% year-over-year growth range, and I think we’ve been able to start to show investors that we have a very consistent business, that we know what we’re doing and that we’re doing all the right things to create value over the long term.

What surprised you about that experience? Because I know we have some entrepreneurs on stage today, who probably have a IPO in their future, maybe some of the audience as well. What did you not expect that you were perhaps taken aback by in that process?

I don’t know, there were a lot of things. One element that I regret I think is that I feel like we let expectations get really high around pricing. For us, it didn’t matter. Our last priced round was in 2014 I think at like $300 million, and I think we somehow let expectations around how valuable the company could be get high and I think that made the $15 price feel disappointing when I think in reality, it didn’t have to be, and so I think there was a little bit of just like how can you try to create some buffer around what external expectations might be so that reality can be on a smoother trajectory that I think I wish that we maybe had done a little bit differently.

And to put a perspective, the $15 price put your value at something like a billion and a half dollars?

Something like that.

Okay, coming from-

We’ve been entity-clear. We’ve been consistently trading pretty significantly above that.

Right.

I think we’ve been probably five dollars north of that pretty consistently since.

Right, and that expectation came from where? That was set. Is it-

It came from honestly all over, I mean it came from external parties who potentially would have wanted to invest in the company, it came from banks, I mean Stitch Fix is a unusual company, we turn our inventory really fast, we’re really capital efficient. In some ways we can look like a retailer, in other ways we look more like a technology company. There weren’t perfect comps for the business, and I think another learning was that there was more education and more trust building with investors that as a private company, I would always preach like you should always be building relationships with investors and potential investors, and I don’t think I did that really as a public company, as we were preparing to be a public company.

You know this, but we were very secretive, we weren’t sharing any numbers, I was very reticent to meet with anybody, and that may have been the right things from a competitive perspective, but it certainly meant that just like a private investor, with a public investor, you have to build trust. You have to build this rapport face-to-face, and they have to understand you and your vision. And that whole process, it takes longer often than a 45 minute meeting in a road show when you’re doing 20 of those in a row. So I think those are a couple of things that I learned.

So you talked about competition a little bit, and obviously, the elephant in any eCommerce discussion is Amazon, right? And so I talked about the intro, the differences between what they’re good at and what your business is really good at. At the same time, they’re making a huge push into fashion. They’ve launched sort of a test called Prime Wardrobe, where you could try on a couple of fashion items for seven days. You are choosing it though still. There are no stylists working on it. How much do you think about that?

We definitely think about them a lot. I mean they’re an amazing company, they’ve done a lot of amazing things. I think in terms of direct competition, I think it’s just a fundamentally different problem. I think that part of the value proposition of Amazon, part of what makes Amazon amazing is this sea of choice. It’s literally millions of things to choose from, and in a lot of ways, ours is almost the opposite. We’re sending you five things, and in some ways, both of them are hard problems, but they solve very different types of solutions, and so Amazon is amazing at the fulfillment. Amazon is amazing when you want something cheapest and fastest, but if what you simply want is a pair of jeans or a dress to wear to a wedding, those are really hard problems to solve when you’re sifting through millions of things which have varying degrees of relevance to you.

So in a lot of ways, I think our value proposition is almost the opposite. It’s not endless choice, in fact, it’s a very select group of things that we think are highly, highly relevant for you. And I think that discovery element is actually some of the hardest part of apparel. I think a lot of times, you’re not looking for jeans that are going to ship to you fastest, you want the jeans that are going to fit your body best. That is a very different value proposition than I think what Amazon has been historically amazing at.

So key word there, historically, right? Historically amazing app. So a couple of years ago, I’ll try to make this brief, a couple years ago Jeff Bezos was on this stage. I found him backstage, managed to ask him what he was wearing. This was around the time that Amazon’s Private Label fashion initiative was starting to get going. The conversation eventually turned to what I was wearing, which was Trunk Club, I tried out that service. Long story short, at some point Jeff mentions that he thinks the real key in discovery is matching technology with human stylists. Which is essentially, at a high level, your model.

That leads me to a couple questions. One is, it seems like Prime Wardrobe is probably just the tip if what they’re going after, they bought companies that do fitting technology. The second thing it leads me to is potential interest in your business, right? So let’s start there. Have you ever had any discussions with Amazon? It feels like it would be a natural fit for what they don’t do well right now.

I mean we were very, as evidenced by the path we took, we were very committed to a path of being independent, taking the company public. And I think now actually, I mean Evan said it yesterday, I think now of course I have a fiduciary duty to make sure that we’re gonna be dong the right thing for the company, so I certainly can’t say never. But I think this is a company that has a lot of value in and of itself. I think there’s a lot of potential in future, in terms of how big the market can be in penetrating our existing market, but also going into new markets. So I think today we’re committed to the path that we’re on.

Okay. Have, the actual question was, have you ever had any discussions with Amazon in the past?

Look, we haven’t had any serious discussions around combining the companies.

Okay. You’d feel that if there was a potential in the future, you’d feel good about that?

Right now, what I can say is, right now we feel really confident in the path that we’re on. I think we are really just scratching the surface in terms of, even awareness. I mean, in the men’s business in particular, but also in the women’s business. There’s still new business that we are really excited about, that are gonna add a lot of market opportunity. And so today, we’re very, very focused on continuing to create value for our shareholders, and feel that this is a company that’s really differentiated and deserves to stand alone.

So let’s talk about the business today. You have a couple million active customers, right?

Two and a half.

Two and a half million active customers. These are people who are, they’re not necessarily subscribing, correct? They’re choosing a certain cadence, or maybe getting one delivery and then coming back at a later date. Over the past year you’ve started to invest a little more heavily in paid advertising. Right? You’ve gone to TV advertising. What has shifted in paid advertising channels over the last couple years? And how does that affect the type of customer you’re getting into Stitch Fix?

Yeah, so let’s see. Just some historical context. For the first four or five years of this business, all of our growth was organic. And there are elements of that that were amazing. Like it was, it meant our people, our clients were telling other people. Every year we’d have marketing budget that we would be setting aside, and we would end up not being able to spend it because we would be sending people to an experience where they might have to wait a long time to get a Fix.

Because of inventory?

Because we, yeah. Because in our model, we don’t want you to sign up. We’re not gonna commit to saying we can get you a Fix next week if we can’t get you one that has relevant product in it.

Right.

So what we would do instead is we would say, “Thanks Jason, the next available date is 90 days from now.” So we had constraints in terms of trying to hire people fast enough. Opening warehouses fast enough. So you can go back in our S1 and see some of those historical growth rates, but they were far higher than what we planned for, and they created a lot of operational difficulty for us. So now these last four quarters, we’ve had very consistent growth. That helps us to be able to buy the right inventory, get it to the right people. But that, I think being able to have more channels than just organic, was really, really important to us from just a business health perspective. Because we needed to be able to have more channels that we could control.

So that, adding more channels was really important. Having diversity of channels was really important. To your point, we don’t wanna be completely all in on Facebook or all in on Google, we wanted to have TV, and direct mail, and lots of channels that were effective. So today we are at a place where year-to-date, we’re spending about eight percent of our revenue on marketing for many eCommerce companies. That’s a pretty modest amount, and it is helping us to drive this 25/20 to 25 percent year over year growth that I described. So we feel that we have been doing a great job of bringing in a more diverse set of channels.

From a client perspective, all cohorts look a little bit different. Like we might do, we’ve done partnerships with American Express or with T-Mobile, and you can imagine how you can see how those customers might be a little bit different. The good news is that we have all this great data, and so when you’re signing up you’re letting us know what you’re looking for. So what that helps us to do is to understand what is our future gonna look like and how can we make sure we’re planning our inventory appropriately? So I would say there aren’t actually huge differences between our paid customers and our organic customers. A lot of that is because of the strategies you use in digital marketing.

Right.

Around identifying who your best customers are and looking for more like that. But of course, you know, the demographics of our customers ebb and flow over time, and I think in those cases especially, the data that we have is really valuable to make sure that we are always having the right inventory for the people who are looking for Fixes.

So something I find when I cover younger commerce companies or digital first retailers, is the idea, some idea from an entrepreneur early on that as they grow, somehow cost of acquisition is gonna actually drop. And what a lot of them actually find is, early on you hit your core audience, and then as you sort of expand out of your core audience, maybe quicker than you thought, cost of acquisition actually goes up. And for a venture capital backed company, that could lead to a lot of problems. Are you finding that to be the case? I know we talked about TV advertising after one of your earnings calls, and you found that those customers, by and large, were looking for lower priced goods. And that has some effect on your inventory and also margins and all that. So do you think you’ve sort of saturated the core Stitch Fix customer?

Definitely not. I think, I mean a couple things, just on the customer acquisition side, one of the benefits of having a business that grew to, maybe it was a quarter billion dollars, maybe it was a third of a billion dollars, all organically. Is that that organic growth, what that actually is a sign of, is product market fit. This is a business where if you can say to somebody, I mean I’ll take myself, a woman in a dual income household, and you can just let somebody know your preferences and a stylist is gonna ship things, and you only pay for what you keep. That proposition has enormous product market fit. And that I think, is what you really are seeing when you see that kind of organic growth.

And that has benefited us a lot as we do pay marketing. So as we’re, as instead of, you know a friend of a friend that was the early thing, that now we’re telling somebody else the proposition still has this very strong product market fit and I think benefits us. I don’t know that we, we’ve seen, what we’ve shared publicly is that over the last year or so we’ve seen customers acquisition costs be stable.

I mean, I think this is at a time when we’ve heard the buzz of other retailers as it’s going up or it’s more competitive, and we’ve seen stability. So does that mean that if it wasn’t more competitive or it wasn’t whatever, maybe it could have been down. I don’t know. But we’ve actually seen a lot of stability, and we can look at our awareness numbers, we can look at our spend numbers, and our efficiency numbers. And we still have a lot of dry powder in the market.

You’ve made a couple of additions to your business recently. So for a long time it was fill out a survey essentially, tell us what your style is like, what your sizes are. We’re gonna send you five things in a box, and if you keep a bunch of them you get a discount. Now you’ve sort of added a little bit of a la carte, where you can add on, for the women’s business this is, right?

Mm-hmm.

You can add on undergarments, or socks or some other stuff?

Exactly.

I wonder, so you made that change recently. Let’s start with why you made that shift.

Yeah, that was really around a shareable odd opportunity, where they’re were clients where I shared data about a client that I actually style, who I’ve been styling for four years, and she spent something like 10 thousand dollars or something with Stitch Fix. And what you can see from that behavior-

Give her very personal treatment.

I do. She’s my favorite client.

Yeah.

But what you can see is we have the majority of her wallet share. And yet she’s still having to go elsewhere to buy things like socks, and undergarments, and bralette’s, and whatever else. So with extras, it was really about how can we be that full service solution for, especially for those clients where we already have a large amount of wallet share.

From a technology and operations perspective, it is also super interesting. Because it’s not that selling socks is gonna be a huge market opportunity, but it certainly keeps people out of stores. It helps to make sure that we can be a full service solution. But building that capability is interesting because now it allows us this testing bed, to do all kinds of new stuff. Because to your point, we’d really only had our first core model. And now allowing customers to choose, being able to have a marketplace of sorts, where we could test and try things that aren’t in the categories that we’re doing today. From an operational perspective now our warehouses know how to ship fixes with 10 items in them, and 6 items in them. There’s a lot of kind, of infrastructure stuff that we had to do in order to do that, that actually opens up a lot of capabilities that allow for more flexibility in Stitch Fix in the future.

You mentioned the word marketplace, which reminds me of another company that starts with the letter A, that has sort of built in their words like a fly wheel, where you add more sellers, add more selection, customers, more customers and it keeps going round and round. I’m wondering, Stitch Fix at times has mentioned sort of, network effects. Is there a fly wheel opportunity in your business? Do we not see it yet? How do you get network effects in a retail business?

I mean there is certainly network effects from kind of us delivering the business. The scale that we have from delivering … Being about to have billions of dollars of revenue. I mean there’s just a lot of scale effects that help our business. I think one place that we don’t spend a lot of time talking about is actually brands. It is a huge advantage that we are a place that brands love to work with. For example, Karl Lagerfeld is doing an exclusive collection for our plus size clients. That’s not been done before. He hasn’t done that with other retailers before. The fact that, I think, a lot of the search terms that people are looking for is brands. I think it’s a really big advantage that we have to be able to be a place that brands love to work, and brands want to do special things to work with us.

Because you’re growing unlike their other sales channels.

Well, because we’re growing. It’s a full price model. It’s a real matching model, and so we’re really kind of finding people who are going to love the brand, and not just finding people who want a huge discount. It’s a very brand friendly. It’s good for your brand to be part of Stitch Fix. I think that’s something that is a pretty significant advantage as kind of opposed to lots of other channels that have become available to brands that are newer channels in the last 10 years.

I promised you we would talk about my Stitch Fix experience, so I want to make sure we get to that. I tried a couple of months ago, and I was not super successful. I found maybe I was in denial how my dad bod had changed over time, or why, but yeah. So, four or five of the things didn’t fit, and or weren’t my style, and so then I was left with a choice. I had a $20.00 styling fee that was gonna go out the window, or if I kept the cheapest thing in the box, which was the belt that I was okay about, it would be a credit towards that. I made the decision I would keep the belt, but it wasn’t a great feeling. You’ve introduced an annual subscription idea where you could pay $49.00 a year and not pay a styling fee each time. Is that your answer to having that sort of sub par feeling from me, as a customer, that I paid $20.00 for … I kept something because I didn’t want to be out of $20.00.

Yeah, I mean definitely. I think firstly when you have an experience like that, giving the feedback is just incredibly important. It’s incredibly important for our data science and our algorithms. It’s important for the stylist, and so I would definitely encourage when things aren’t fitting properly, or if it’s not your style, we’ve love to understand why.

But a lot of people after the first try, like me, I was like I’ll probably try again because I cover the company, but I’m sure there are plenty of people who don’t.

Yeah. I mean there are certainly people who will try it once and it’s not a fit. Overtime what we do is hard. It is literally like you show up at a restaurant and someone just serves you food.

Yeah.

I think there’s also a lot of clients that give us the benefit of that and understand that it takes a few times to kind of get to know each other, but there are clients for sure that will show up, and it’s not a fit the first time, and it’s not a fit for us to serve them either. I think we can serve you though.

Okay. Are you thinking about ways where around the $20.00 …

Sorry. To come back to the Style Pass thing. The Style Pass is they’re especially for clients who have been with Stitch Fix for a long time who buy a lot with Stitch Fix. First of all, we can identify you, so we know if you bought one, but you weren’t really excited about the one thing you bought. We can identify you and we actually treat that as-

What do you mean you can identify us? That sounds scary.

Oh, I’m sorry. I mean it means that we know is this a happy client? Is it a disappointed client?

Okay.

Right, so based on the feedback that you shared I mean assuming that you said that you didn’t really … Anyway, so we can usually figure out how to treat you differently from a marketing perspective. I think the Style Pass does remove some of the, I think, guilt or burden, I think, of the $20.00 styling fee. And what we found in tests was that it increased share of wallet, and so it made it that you had a higher propensity to get another fix. It means that you are actually spending more on an aggregate basis with us over an annual bases than without Style Pass. Yeah, it is meant to remove a little bit of that friction.

Okay. We have time for a couple of the questions if we have them. There’s a mic here and a mic here. Otherwise, I’ll keep going. All right. I know there are some questions. I’ll keep going for now. One thing we haven’t talk about is, sure and maybe it’s a good thing, but hopefully in the future we won’t have to talk about that you being a woman and a leader of a tech company and one that went public has been very, very rare. I’m wondering looking at the make up of your board, the make up of your leadership team, I’m wondering in your position do you feel a responsibility to sort of being outspoken about how you can build a company with women at the top, with people of color at the top, or are you more on the side of sort of letting your business speak for itself?

Is my thought on it has definitely evolved. I think we were always doing the right things for the business, and having a diverse team, and bringing a lot of perspectives together was part of what we always thought was building a great business. To your point I think our management team is 50/50. I’m gonna do a quick math in my head. I think 80% would be categorized as some diversity element. It wasn’t necessarily that I was going through and kind of building the team that way of this person needs to be X or Y, but we were able to do that and build the team that was right for the company. I think actually one of the things that has been a valuable concept has been this concept of culture ad versus culture fit. I think there’s an inclination for companies-

Explain that.

I think companies can say you’ll meet a candidate and be like, oh is this person a culture fit or not, but trying to look for more people who fit in is kind of the anti-diversity. Growth comes from learning. The way that you are growing a human, the way that your company grows, all of that is through trying new things through learning and growing, and that learning really comes from seeing different perspectives, and seeing things in a way that you didn’t see it before. And that can come from the people you surround yourself with, and so I think diversity in terms of backgrounds is important.

I also think diversity of thought is important. The fact that a lot of what has made Stitch Fix successful has been data scientist sitting a long side stylist and trying to understand how a stylist’s brain works. Those are two groups of people that aren’t often having coffee together. Yeah, what I hope is that we can be the living, breathing example of why diversity is important, and how you can build that into a big, large publicly traded company. At least we can serve as an example, but I do also now feel more responsibility I think to make sure that people see it as an example of that.

Time for one question. Just tell us who you are.

Amanda Kludt: Okay. Amanda Kludt, Editor-in-Chief of Eater. I was just wondering what your thoughts are on the higher end of the fashion space. I know Rent the Runway is kind of in that space. Are you considering going there? What are your thoughts about it?

Katrina Lake: Yeah. We don’t have any immediate plans to share on that, but I think it’s definitely interesting. I mean as our brand has gotten better known there’s a lot of interest, and I think what I’ve realized is a lot of the higher end brands have a lot of the same challenges that a lot of … In our case now we do have kind of more in the mass market price point and then in contemporary, and not all the way into luxury, but they have a lot of the same challenges that our contemporary brands do, and so I think I’ve become more aware of what the challenges are. I think it’s interesting. It would probably have to be different service, I think, than what we do today. It’s definitely not on any immediate timeline, but I definitely think it’s interesting and we love to be part of helping retailers and brands over the long term.

Jason Del Rey: Okay. I’ll report it before it happens. All right. Thank you, Katrina.

Katrina Lake: Thank you, Jason.

Jason Del Rey: Thank you. Thank you.

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