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Stitch Fix CEO Transition: What Investors Need To Know

Stitch Fix (NASDAQ: SFIX) dropped a bombshell on investors Tuesday night.

The personalized styling service said that founder and CEO Katrina Lake would be stepping down from the chief executive position on Aug. 1, transitioning to the role of executive chairperson and a yet-to-be-named position as an employee with the company focused on social impact efforts, developing brand and merchandise partnerships, and assisting on hiring. Current President Elizabeth Spaulding will replace her as CEO.

Image source: Stitch Fix.

Investors did not take the news well; shares fell 5.3% on Wednesday. As the founder of the disruptive company, Lake is seen as the visionary behind the company's data science model, and at just 38 years old, most investors had expected her to lead the company for many years to come. Surprise transitions like this are also generally interpreted negatively as investors often think they're reflective of internal discord or poor performance inside the company.

However, the sell-off seems to be an overreaction for a number of reasons.

First, it wasn't as much of a surprise as it might seem. Spaulding joined the company as president in January 2020, a title implying that she would share some of the duties of running the company with Lake. Her comments on earnings calls have indicated as much, showing she was in charge of a number of the company's key business initiatives, including the direct buy rollout, which is due to launch with new customers at the end of Q4 in July. Lake also did not field any of the questions on the most recent earnings call, allowing Spaulding and CFO Dan Jedda to instead engage with analysts, showing that she was stepping back from some of the core CEO responsibilities, perhaps a sign Spaulding was being groomed to take her place.

Incoming CEO Elizabeth Spaulding. Image source: Stitch Fix.

Who is Elizabeth Spaulding?

Spaulding joined Stitch Fix after a 20+ year career at the consulting group Bain & Company, where since 2014 she'd been the global head and founder of the company's Digital Practice, a division focused on technologies like automation, data mining, and machine learning -- all of which are core to Stitch Fix's data science model. Spaulding also founded ADAPT, the company's software engineering group.

According to the press release in late 2019 that announced the 45-year-old's hiring, Spaulding was brought on to "lead initiatives and innovations that focus on driving the next phase of Stitch Fix's growth, including direct-buy capabilities and the company's international expansion efforts." The statement shows she's been instrumental in the direct buy rollout since she joined the company.

In announcing the CEO transition, Lake said of Spaulding, "The impact Elizabeth has already had, combined with the compelling future vision she's mapped out and is leading us toward, make this the right time for a leadership transition that will usher in the next generation for Stitch Fix, for our business, our people, and our clients."

Image source: Stitch Fix.

No reason to worry

It's understandable why investors might dislike the move, especially as the company is closely associated with Lake and the growth stock tumbled after its latest earnings report. But the transition is not the shake-up it might seem. First, Lake isn't leaving the company. She'll be the executive chairperson of the board, and active in the areas of the company where she believes she can add the most value, leaving the hands-on, day-to-day parts of the business to Spaulding. With a strong background in the development of global businesses and the intersection of consumer brands and technology, Spaulding is well-qualified for the role.

Additionally, the timing of the move makes a lot of sense. Stitch Fix is set to open up its direct buy program to new customers in July, allowing anyone to shop directly on its site from a curated selection of clothing, rather than using its traditional Fix model where the company sends out five pieces of clothing and customers keep what they want.

It's hard to understate the importance of the launch of the direct buy offering to new customers. With it, Stitch Fix is essentially transitioning to an entirely new business model and expanding its addressable market by multiples. Shoppers will no longer have to order a Fix if they want to shop with Stitch Fix. They can shop the site as they would with any other e-commerce apparel company, only this time with the benefit of a highly refined recommendation engine guiding their options.

In five years or less, direct buy could make up the bulk of the company's sales, and Stitch Fix sees this expansion and the data science model behind it as the future of the company. Lake clearly thinks that Spaulding is the best person to run the business as it transitions to a direct buy focus, and it's evident why, based on Spaulding's background and work thus far at Stitch Fix. Investors who trusted Lake to run the company should also trust her judgement in passing the reins on to her chief deputy at a pivotal moment for the company, especially because executing the direct buy expansion is so crucial.

The key question for investors at this point isn't why Lake is stepping down or who's running the company, but how the direct buy launch will perform. This is likely the biggest test for Stitch Fix as a publicly traded company. It's impossible to know how it will play out until it goes live, but if direct buy takes off, the upside for that program and other applications for its recommendation algorithms is enormous.

For that reason alone, investors should shrug off the transition-related sell-off and focus their attention on the upcoming direct buy rollout, which the company has been building toward for years. If it's successful, there will be no doubt that Lake made the right move.

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Jeremy Bowman owns shares of Stitch Fix. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.


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