Is Stitch Fix Still a Buy Now That Its CEO Is Leaving?

We recently learned that Stitch Fix (SFIX 3.69%) founder and CEO Katrina Lake plans to step down from her leadership role later this year, and the stock didn't exactly have a positive reaction to this news. However, Fool.com contributor Brian Withers doesn't think this is reason to sell. In fact, in this Fool Live video clip, recorded on April 15, Withers makes the case that the exact opposite is true. 

Brian Withers: I'm up with Stitch Fix. In light of a recent announcement in the CEO change, I figure it'd be a good time to take a quick look at this company and really all the things that I got excited about this company a year, two years, three years ago are really the same things that are going on today, but the stock is significantly off the high so let me just jump in.

If you're not super familiar with how Stitch Fix works I'm going to take you through a quick run through. You sign up, it's super easy online and you go through a questionnaire, provide them sizes, things like that. You get matched with almost 6,000 different stylists. So not only does their machine learning and AI capabilities help you, but at the end, before you get sent clothes, there's a human that looks at this and takes a spin on it and interprets your, I want a puffy shirt kind of thing or, I don't like plaid, and those kinds of things to help make that selection of clothes that you're going to receive to be the best that it can be. You get a three-day window to try stuff on at your house.

People really get into this and they provide a ton of feedback to Stitch Fix, which really helps the algorithm get better over time. The more data you provide it and the better the stylist understands you, the more luck you're going to have with getting things that you really like and that's beneficial for both what they call the client, who is the customer, and Stitch Fix. They have this huge data model. They've got tons of clients across a number of different categories. Not only are they doing third-party brands, they're doing Stitch Fix brands, too, and these are things where they've seen demand in a particular category, and there really isn't a niche product to fit that in the brands that they go to. They've been fairly successful and that's been growing over time. What's cool is they started with women and then there's a bunch of different places where they can go both in serving different kinds of clients and serving different kinds of products, different kinds of countries, and selling in different ways. They've been very experimental and that's one of the things that I'm going to talk about why I think Stitch Fix is really a great buy today.

Although I can't say great buy, I think it's a great stock for you to consider. This is some of the benefits of Stitch Fix. It's very scalable, we've seen them grow considerably. They have almost 3.9 million active clients today, which means somebody who's bought something in the last 12 months. The more data they get, the better they are at it. This flexible offering down here, I've really seen them embrace the spirit of experimentation and very much a test and learn environment.

A couple of years ago when they weren't getting enough data on their clients, they put together something called Style Shuffle, which was almost a Match.com, swipe left, swipe right kind of thing for a bunch of clothes and that got tons and tons of data that helped them be more predictive and more accurate. They've also tried a number of things like 30-minute online sessions with a stylist, or even now, they're doing the preview capability which you can see your Fix before it comes to you.

Here's the market, Stitch Fix has about $500 million in trailing-12-month revenue. They are really only in the U.S. and Great Britain, there's about $127 billion of annual clothing purchases online. You can see the total purchase bucket as well and both of these categories are growing significantly. So if you look at five years or even four years, $500 million in a market of $220 billion, they have tons of room to grow and their experimental approach on things is allowing them to A/B test and just make their process better and their experience better every quarter every year.

Here's where the stock is, it languished for a long time in the $20s, peaked above $100, and now it's around $46, which is almost 60% off the peak. Looking at a 50% off sale for Stitch Fix gets me excited and it's not that Katrina Lake, the CEO, is going anywhere. She owns a quarter of the shares of the company, she is highly invested in this company. She's going to continue to stay on as executive chairman and really look forward to what this company is going to do over the next five and 10 years.