The 180-day lockup period for Stitch Fix Inc. (SFIX) ends on May 16, 2018. When this six-month period ends, the company’s pre-IPO shareholders and company insiders will have the opportunity to sell more than 56 million shares of currently-restricted stock. Any significant sales could cause a flood of shares into the secondary market and provide a short opportunity for risk-tolerant investors. Just 10 million shares of SFIX became eligible for trading pursuant to the IPO.

(Source: S-1/A)

The group of restricted shareholders includes eight individuals and three corporate entities.

(Source: S-1/A)

Stitch Fix has a return from IPO of 53%. The SFIX IPO had a first-day return of 1%.

Business Overview: Apparel Manufacturer Based in San Francisco

Stitch Fix is an online personalized apparel manufacturer based in San Francisco. The company’s product portfolio includes apparel, accessories, and shoes in a wide variety of categories, product types, brands, and price points. Its categories are Women’s, Men’s, Maternity, and Plus, and its apparel includes dresses, denim, blouses, shoes, skirts, handbags, and jewelry. The company utilizes data science to tailor its portfolio based on a growing database of customer and merchandise data. Stitch Fix does this with its proprietary algorithms, and they impact its entire business model with prediction of forecast demand, purchasing behavior, inventory optimization, and designing new apparel.

(Source: Stitch Fix website)

Stitch Fix programs its SKUs with basic data, including size, brand, color, silhouette, pattern, and material. The SKUs also contain data on width, length, distance from collar to top button, diameter of sleeve openings, and other nuanced details. The company offers its apparel over multiple styles and price points from more than 700 brands.

(Source: S-1/A)

As of July 2017, Stitch Fix had close to 2.2 million active clients. Their repeat customer rates were 83% in 2016 and 86% in 2017. The company was originally incorporated as Rack Habit. It changed its name to Stitch Fix in 2011. Its headquarters are in San Francisco, and the company has approximately 5,800 employees.

Company overview was sourced from the SFIX S-1/A.

Financial Highlights

For the second quarter of fiscal year 2018 ended January 27, 2018, Stitch Fix reported the following financial highlights:

• Active clients grew to over 2.5 million, which represents an increase of 31% and 588,000 versus the same quarter of 2017
• Net revenue increased to $295.5 million, which represents an increase of 24% versus the same quarter of 2017.

Financial highlights sourced from SFIX press release.

Management Team

CEO Katrina Lake founded Stitch Fix in 2011. Her previous experience includes stints at Polyvore, The Parthenon Group, and she is a board member of GrubHub. Ms. Lake holds a B.A. in Economics from Stanford University and an M.B.A. from Harvard University.

CFO Paul Yee has served in his position since June 2017. His previous experience comes from financial positions at PAD NV, People Against Dirty Holdings, Gap, and Peet’s Coffee & Tea. Mr. Yee holds a B.A. in Urban Studies and an M.B.A. from Stanford University.

Corporate biographical information sourced from company website.

Competition: National, Global, and Local Department Stores, Specialty Stores and Others

The apparel industry is high competitive with many players, including eCommerce sites, traditional retailers, online platforms of these traditional retailers, discount stores, specialty clothing and shoe chains, and department stores, as well as internet giants such as Amazon (AMZN).

Early Market Performance

The underwriters for Stitch Fix priced its IPO at $15 per share, lower than its expected price range of $18 to $20. The stock closed on its first day of trading at $15.15. It reached a high of $29.14 on December 26, 2017. Currently, the stock trades in the $22 to $24 price range.

Conclusion: Short Shares Ahead of May 16th IPO Lockup Expiration

When the SFIX IPO lockup expires on May 16th, more than 56 million shares of currently-restricted stock will be eligible for trading. With just 10 million shares offered in the IPO, significant sales of restricted SFIX stock could flood the secondary market and cause a sharp, short-term downturn in SFIX share price.

Risk-tolerant investors should consider shorting shares of SFIX ahead of the May 16th lockup expiration. Interested investors should cover their SFIX short positions during the May 17th and May 18th trading sessions.