Felix Narhi of PenderFund Capital Management presented his in-depth investment thesis on Stitch Fix (US: SFIX) at Wide-Moat Investing Summit 2020.

Thesis summary:

Stitch Fix is an innovative online apparel retailer with attractive unit economics supported by durable competitive advantages, led by a mission-driven founder and available at a sensible price. The company combines data science and proprietary data with human judgment to deliver hyper personalization at scale, transcending traditional brick-and-mortar and most undifferentiated e-commerce retail experiences. The apparel market is massive. As online shopping continues to take share from offline, Stitch Fix should continue to outpace the market through increasing share of wallet, acquiring new clients, and expanding its addressable market.

The company has developed a proven, scaled financial model with headroom for growth. Stitch Fix is at the early stages of expanding beyond its successful “beachhead” clothing box model and into larger markets. Its new Direct Buy initiative provides existing and new clients a low-commitment and low-friction path to personalized shopping. This market is not only larger, but potentially has more attractive unit economics once at scale. It is an opportune time to launch stay-at-home services as e-commerce adoption is surging due to COVID19 while numerous bricks-and-mortar peers struggle to remain viable.

Stitch Fix hit management’s long-term operating margin targets first in FY15. Income from more mature segments is funding new, promising initiatives, thereby obscuring reported profitability. Trading at ~$24 per share, SFIX is a compounder available at a sensible multiple of about 10x “steady state” operating profit.

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About the instructor:

Felix Narhi is the Chief Investment Officer of Pender and the Portfolio Manager of the Pender US All Cap Equity Fund and the Pender Strategic Growth and Income Fund, and Co-Manager of the Pender Value Fund. Prior to joining Pender in July 2013, Mr. Narhi spent over nine years at an independent and value-oriented investment firm in Vancouver. Mr. Narhi holds a Bachelor of Commerce degree from the University of British Columbia. He earned his Chartered Financial Analyst (CFA) designation in 2003 and is a member of CFA Vancouver. Mr. Narhi advocates a business-like approach to investing. Sound investing is the process of determining the value underlying a security and then buying it at a considerable discount to that value. The greatest challenge is to maintain the necessary balance between patience, emotional fortitude and discipline to only buy when prices are attractive and to sell when they are dear, while avoiding the short-term “noise” that consumes most market participants.

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