By Ben Cogan
I don’t think most people working in DTC understand how badly public DTC companies have performed in the stock market. It’s bad–really bad.
Almost no one has been spared. Here’s a rundown of the performance of some representative brands: MC denoted “Market Capitalization”
- Allbirds (Footwear). Down 96% from peak. Market cap: $176mm
- Blue Apron (Food). Down 99% from peak. Market cap: $48mm
- Smile Direct Club (Teeth aligners). Down 98%. MC: $157mm
- Warby Parker (Eyewear). Down 82%. MC: $1.22B
- Bark (Pets). Down 93%. MC: $256mm
- Honest Co. (Eco-friendly products). Down 92%. MC: $174mm.
- FIGS (Fashionable scrubs). Down 85%. MC: $1.08B
- Stitchfix (Clothing). Down 95%. MC: $565mm
- Rent the Runway (Clothing rental). Down 95%. MC: $189mm
- HelloFresh (Food): Down 78%. MC: $4.12B
- Wayfair (Furniture): Down 89%. MC: $3.96B
- Hims (telemedicine). Down 63% from peak but slightly up(!) from De-SPAC price. MC: $2.15B
In general, DTC stocks are down 85-90%. For context, during the dot-com bubble, NASDAQ fell about 75%.
What went wrong? There are several layers of explanation.
The surface one is most stocks, especially tech, are down. NASDAQ is still down 23%, for example, and the IPO index is down 62%. Why? Mostly the Fed. Valuations mechanically go down when interest rates rise.
Let’s go a layer deeper. Why are tech stocks down so much? Because tech is a bet on future profit and cash flow growth. Utilities stocks, for example, are only down 13% from peak because they are mostly predictably generating profit *today.* Most tech stocks, to put it delicately, are not.
This is the main problem for public DTC companies. They just…don’t make money. Here are the net income profiles of the companies mentioned above for 2022:
- Allbirds: -$101mm
- Blue Apron: -$110mm
- Smile Direct Club: -$86mm
- Warby Parker: -$110mm
- Bark: -$68mm
- Honest Co.: -$49mm
- FIGS: $21mm
- Stitchfix: -$207mm
- Rent the Runway: -$212mm
- HelloFresh: $127mm
- Wayfair: -$1.3B
- Hims: -$66mm
Figs and HelloFresh are the only companies to have been (barely) profitable in 2022. Most companies' net income margins were -10% to -90%.
Going down another layer, it’s pretty clear to me the core issue is the initial funding profile of these brands. All of the above companies were venture-backed and rewarded for growth at all costs. The market flipped to rewarding profitability and these brands were caught flat-footed.
To be even more blunt, I don’t think this is simply a positioning issue. When a DTC brand is founded as a venture-backed business, profitability is rarely in the company’s DNA.
Brand’s can’t pivot to profitability quickly or, in many cases, at all, because they never really had product market fit. This was hidden for years by a gusher of venture capital subsidies. There are some great VC-backed exceptions, of course.
Ben is the founder of Agora, an acquirer of profitable DTC brands.