Stitch Fix is an online personal styling company that offers services in the United States of America. It deals with cloth line and offers clothing services to both children and adults of all genders. It personalizes clothing items based on size, style and even budget. It was founded in 2011 and by the year 2017, it was valued at 1.6 billion dollars with an approximation of 3 million customers. It has almost 8000 employees and has it’s headquarter in San Francisco, California. (Fix S. , 2015). The aim of this assessment is to analyze the valuation of Stitch Fix.
Its founder is Katrina Lake and J. Crew buyer, Erin Morrison Flynn. It started as Rack Habit and at had its stores in Cambridge, Massachusetts. It started off by offering services to women and later on expanded into men’s clothing and other wares such as maternal and kids’ clothes. By the end of 2014, it recorded a sale of 730 million dollars and by 2017, it had managed to create 42 million dollars from outside investors, it went public in 2017 (Fix, 2017).
Valuation is the process of estimating the monetary value of an organization and is calculated by adding the revenue of the company by the cash flow. There are different methods of valuation that entails; asset valuation, Historical Earnings valuation, relative valuation, Future Maintainable Earnings valuation and discount cash flow valuation (Matschke, 2010).
In discount cash flow valuation, profits are assumed to vary in the future. One calculates the future net cash flow and uses them in the present day to discount them. This method allows one to estimate the value of assets the business will make in future. It has two stages, growth rate and a stable rate. The idea behind this method is that the dollar in future is less valuable than in the present. The present value of 10 years of cash flow is $1.88bn the terminal value, assuming the government has a bond rate of 2.7%, the discount terminal cash flow is valued at 11%.
=FCF2019*(1+G)/(R - G) = 669M * (1 +2.7%) / 11% - 2.7%=8.2b.
In the present value of terminal value
TV/ (1 + r) 10= 2.8b
The approach of future maintainable earnings valuation assumes that the profitability of one business in the future is determined by its value today. In the third quarter of 2019, stitch fix increased its sales as it was compared with the Wall Street expectations. The shares were at 7 cents as expected to drop by 3 cents and the revenue was at 408.9 million dollars against 394.9 million dollars as expected.
Relative valuation is used to determine how much a business of same character will bring if it could be sold. This values the business assets and compares it with another company of same caliber. Stitch fix is compared with L Brands and was found to be of similar mean and median of 2.4 billion in market cap and 7.2 billion on revenue and a difference of 0.25% on profit margin, 4.98% div. Yield, 1.19 Beta, 27.35 P/e, 18.83 EV/EBITDA, 0.63 P/S and negative P/B of 0.02
Historical Earnings valuation is assumed to be the ability of a business to repay debt and capitalization of its cash flow or earnings in determining its current value. This value is found on the above information and it was calculated by taking the latest closing price and dividing it with the most recent earning per share number. Assets valuation includes tangible and intangible items.
Aswath Damodaran. (2012). introduction to valuation. NYU.
Fix, S. (2015, may 5). Stitch Fix Online Personal Stylists for Women. Recuperado de. Retrieved from http://www.stitchfix.com
Fix, S. (2017). What is stitch Fix & how does it work? FAQ.
Mark Hirschey. (2003). stock valuation. boston: academic press.
Matschke, M. J. (2010). Fundermental of functional business valuation. Journal of business valuation and economic Loss Analysis , 1.
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