Rundown: American Eagle sues Amazon, Grove Collaborative' cash infusion and Stitch Fix's path to profitability

0:07Hello and welcome back to the Modern Retail Rundown. I am senior reporter Gabby Barco, and I am back this week with editor-in-chief Kale Guthrie-Weissman. Hey, Kale, how are you? I'm doing well, Gabby. How was your vacation? It was great. Yes, it was much needed. Got a lot of rest and downtime and ready to get back in the swing of things, as they say. Hit the ground running, talk about retail, all that jazz, but it's always good to get a little bit of a break. Yeah, and very fitting. We are going to start this week by talking about Amazon. I believe you did talk about it while I was gone. Surprise, surprise.

0:48But this week, we're going to be talking about a lawsuit that American Eagle filed against Amazon over counterfeits. This has been an issue for years now, so we will get the latest look at that. And then after that, we will look at the latest cash infusion that Growth Collaborative, the online sustainable cleaning marketplace brand, has gotten to help overhaul its business. And then speaking of overhauling, we are going to take a look at the latest update from Stitch Fix, which brought in a new CEO last year and is also on the small tier turnaround plan. But yeah, first up, let's talk about American Eagle and why they're suing Amazon.

1:38Yeah, so it's happened earlier this week. Pretty much, it's a pretty, I don't want to say a cut and dry case, but it's a pretty easy to understand is what I'll say. American Eagle has filed a lawsuit against Amazon over trademark infringement of its Aerie brand. According to AE, it doesn't sell Aerie products on Amazon. It's specifically like nicer products like yoga pants, things like that. But there have been proliferating knockoffs all over the site. Here's a quote that I thought sort of summed it up from the CNBC report. American Eagle accused Amazon of, quote, flagrant unauthorized use of the Aerie and offline by Aerie trademarks on its site to deceive shoppers into believing the products were available on Amazon, drive traffic to its platform, and sell competing merchandise.

2:28So pretty much it's an issue of it's not on Amazon, but you can find products that look an awful lot like it there. And now American Eagle is suing. Yeah. And as we mentioned earlier, this is not by any means a new issue. Counterfeits have been a problem on Amazon for years now. Companies, you know, these real famous brands have also complained about counterfeits for a long time. For example, in 2019, PopSockets sued Amazon for pretty similar reasons. And then Birkenstocks pulled its products in 2016, also over an influx in fakes. There's, you know, I think I'm sure that's still an ongoing issue, but it is really ruffling these brands' feathers, obviously.

3:16And so now this is, you know, the American Eagle lawsuit seems to be the latest example of that. But we can talk a little bit about what Amazon says it has tried to do over the years, which is cracking down on counterfeit products. I feel like we've written a lot about all of the measures that it and other marketplaces, but specifically Amazon has taken to stop the issue. but it seems like maybe obviously it's not solved yet. But for example, this year, they said that they stopped 700 ,000 accounts from trying to sell fake products from being created. So yeah, I don't know. What are your thoughts on this sort of whack-a-mole issue that's been going on?

4:02Yeah, I mean, it's essentially a whack-a-mole issue and Amazon for years, it's been a problem plaguing it. It has always said that it fights it, but it's been being much more proactive over the last few years. And there are many reasons for this. There are things like the Inform Act, which is a law that requires sellers to have an actual address, and that's a way to stop unauthorized sellers. And then Amazon is just trying to get ahead of this conversation. And so, like you mentioned, the 700 ,000 accounts that it stopped this year. Every year, Amazon comes out with a new number about all of the fake accounts, all of the counterfeits.

4:40It stopped. And it also usually touts its technology. Usually, it's AI that it's able to pretty much look over all of the new accounts that are created, all of the products on the marketplace, and figure out which one is real and which one is fake and go from there. But of course, things can fall underneath the radar, which is likely what Amazon is going to say is the issue with these American Eagle products. But as you said, and I repeated it, it's whack-a-mole. There are millions of listings on Amazon, and there's no way to combat every single one to make sure that they are true authorized sellers selling the correct item.

5:20Right. And not to mention that AI or any scanning is probably not getting every single fake product because counterfeits are notoriously very good these days. You can you it's very hard to tell even with the naked eye. So I'm sure that's contributing to it. But another number they threw, which maybe I think a month or so ago, they said that they spent 2 % of net sales on the this, you know, project of cracking down on counterfeits. And that's a lot of money. I can't I can't even fathom what that is. But 2 % of Amazon net sales is a lot. So obviously they are taking it seriously. But again, once somebody like American Eagle is accusing you of it, it can get a little bit hard to gauge.

6:08Yeah. And there are a few things that are specifically interesting or at a wrinkle that make the American Eagle issue of note now. One, and this is something that I'm just personally fascinated with, is that this corresponds with the rise of dupes where, you know, before they were called knockoffs. Now dupes are a nicer way of saying knockoffs, essentially, where, you know, it looks like the product, but you know it's fake, but it's the same quality. They've become very big on TikTok. And I imagine that, I mean, Amazon is rife with dupes, and a lot of them actively claim to be dupes, and they're proud of it.

6:43But American Eagle isn't claiming that these are dupes. They're claiming that these are counterfeits using its trademark. But there's another thing, which we actually read about this week. If you're listening, I highly recommend you read this story because I imagine that this has to do with another initiative that Amazon has been enacting, which is it's trying to get more apparel brands and apparel sellers to sell on Amazon specifically to compete with the likes of Shein and Timu who sell cheaper apparel. And so it last year reduced its fees for third-party sellers selling certain apparel items under a certain amount, like around$10.

7:20So pretty much for most Amazon sellers, fees have been going up year after year after year. But Amazon last year was like, no, we're going to reduce the fees for cheaper clothing so that we can have a better marketplace and more competitive marketplace. But as we wrote about earlier this week, this has led to some issues specifically related to unauthorized sellers. So more unauthorized sellers are putting cheaper products on the platform. And this is leading. This gets a little bit complicated. But essentially, if you're a big brand, you're probably selling Amazon via first party, which means Amazon buys it like a normal wholesaler.

7:57It buys it in bulk at a set price. Amazon sets the price on the marketplace itself. But if you're a third party seller, you can have a product that looks a lot like it, maybe is the exact same thing as it, and lower the price. And if you're an unauthorized seller, you might have a price lower than what has been set by the 1P. And then you're going to get the buy box, which means that you're going to get those sales. And so a lot of name brands are actually annoyed by this lowering of the fees on Amazon because it's meant that unauthorized sellers are actually competing better with them and able to put in lower prices that are below their margins.

8:34So because of Amazon's attempt to try and grow its apparel business and compete more with lower price marketplaces like Shein, it's leading to this really gnarly issue with unauthorized sellers, counterfeiters, putting in the rock bottom lowest prices that are competing with the actual products and people aren't happy. So we're probably going to hear more issues, maybe not identical to this, but similar to this over the next few months to a year as Amazon figures out how to how to run its fees so that brands are happy, but also it can still have cheaper apparel on there. You know, we're going to have to see what happens, but or how Amazon responds.

9:13But American Eagle did say that it had warned Amazon about this on August 9th. So it's been, yeah, almost two months now. Also, the lawsuit claims that Google searches for Aerie are often featuring fake ads. So it's sort of funneling these people who are searching for these products to Amazon instead of Aerie's direct-to-consumer site. And so most ads now seem to have been taken down. But clearly, this kind of has a trickle-down effect across the shopping experience for Aerie. Yeah, no, I tried to find these Amazon listings. And honestly, this is a few days after the story went live. I have not been able to find as many.

9:57If you search Aerie on Amazon, you do find some listings, but they weren't on the first few search results for Google. But still, this is a big problem for Aerie. I thought this was a really interesting statistic, but Aerie accounts for 32 % of American Eagle's total sales. And so if its sales are being infringed because of counterfeits on Amazon that can present a real problem. And so just in terms of what Ari said in its lawsuit, it's seeking a tripling of its actual damages, punitive damages, and a stop to further infringement. So it's asking for three times what it says has been happening.

10:33And that's probably going to be a lot of money. I imagine Amazon wouldn't be thrilled with that. So it's probably going to try and find a way to stop that from happening. But we'll have to see what happens. All right. Well, next up, we are going to look at the latest update from another e-com retailer, Grove Collaborative. It is overhauling its business through a bunch of different initiatives, which this week includes a fresh cash infusion. And it is also slowly but surely paying off its debt terms. So yeah, let's get into it. This week, Grove Collaborative, for those not familiar, it is known for selling sustainable home cleaning and personal care products, announced that it received a$15 million investment from Volition Capital, which is a growth equity firm that also had invested about$10 million last year in Grove.

11:31So, yeah, about$10 million of that money is going to go to help pay off some debt, I think, actually coming up in November very soon. Currently, Groove's debt is at about$30 million. And we will get into how that number has been shrinking and helping it narrow its losses. Yeah, it seems like the, you know, we'll talk about this in a few minutes, but, you know, Grove went public. Its entrance to the public markets haven't been amazing. It was one of the companies that was a SPAC entrant. And, you know, it's had some difficulties on the public market is what I'll say. But under its new CEO, it's been really focused on refocusing the business and also just paying down its debt.

12:20And this latest update is clearly a way to signal to the world and to investors like we're not going to be delinquent. We are going to pay this down and we're ultimately going to become overall profitable. And so it's an interesting update. And I feel like it's one of those where usually with these new platforms, you hear updates about platform expansion, different things like that. But for Grove, it's been all about figuring out its financials and getting to a path to profitability, which makes a lot of sense in this current environment. Part of this meant also last year they had a pretty big leadership shakeup where co-founder and CEO Stu Landsberg left and Volition came in and brought in its own board members.

13:06For example, Larry Chang, who we're going to quote him, he spoke about the latest investment. He came in as a board member. They also brought on a new CEO, Amazon veteran Jeff Yerkeson. who came in to help turn things around. So a lot of shakeups in the last year, but why don't we get into, yeah, what Larry Chang said and also what the latest numbers show, which unfortunately means, you know, it's just been declining sales still, but they are making some headways, which we will get into. Yeah, so what Chang said was, quote, to be candid, we thought Grove was not managed well in the years prior to our original investment.

13:47But he added that this new direction now prioritizes, quote, profitability and balance sheet strength over revenue growth. And to just give a sense of what that is, gross margins did grow at its most recent second quarter earnings. But revenue fell 21.2 percent to 52.1 million. DTC orders dropped by about 25 percent. And DTC active customers also fell about 34 percent. But, you know, it's been focusing on narrowing its losses. It's also been it's gotten positive EBITDA, which is something that they've been pushing for a lot. And so while they still have a lot of debt to pay off, they've been making headway on a lot of other ways to show that they have a better balance sheet.

14:31And that's something when you talk to them, they will focus on a lot. And I would say like narrowing your losses to$10 million and paying down a$42 million of term debt is nothing to sneeze at and pretty big for a company that seemed to be not doing well just about a year ago. Yeah. They also had some other cost-cutting initiatives just in the last year or so. One of the big ones was actually switching to Shopify. They used to have a custom direct-to-consumer website. So that is helping cut down a lot on costs. And earlier this year, they also are, you know, they've been trying to push their retail line, which is their private label.

15:15Of course, you know, they sell private label and third party products, but they have been for years now trying to really focus on their in-house brands. And so they had a big brand refresh, which is, you know, sold at retailers like Target, Walmart, Costco. It's sort of like the refill system that they're known for. But yeah, so all of this kind of points to that they are heading in this direction. It's just in under a year. It looks like they've made some headway. But it's going to, of course, take some more time to get back into growth mode, as we saw from the revenue numbers. Yep. It'll be interesting to see how the next few quarters go.

15:57So the focus now is, I imagine, just continuing to focus on profitability, pay down more debt, and continue with this, you know, getting things back to an even keel. Yeah, and it sounds like that's what volition is really gunning for. So under their watch, we will be, yeah, we'll see what's happening, what happens. All right, well, now let's take a look at another money-losing startup that here at Mono Retail we've covered for years. But it also is on a turnaround trajectory. So Stitch Fix this week reported that it expects to get back into growth mode in two years. We'll get into why that's kind of a specific period of time.

16:43But let's talk about their numbers and Stitch Fix, which has also kind of their customer experience and just their offerings have really undergone a lot of changes in the last couple of years. They were known as this styling subscription box that people received, but now it kind of moved away a little bit from that to be more flexible in order to just appeal to more people. Yeah. So first, let's just look at some of the numbers from its most recent earnings. It reported its fourth quarter or fiscal year 2024 earnings this week. The quarterly revenue fell 12.4 % to$319.6 million. It lost 613 ,000 active clients this past quarter.

17:31But net revenue as a whole fell 16 % to$1.3 billion for the entire year. But the net loss was narrowed by 25 % over the last year. So its net loss was$128.8 million. And as you said, a lot of this is probably due to just sort of it's changing the business model, changing the customer experience, trying to find what the most sustainable way to keep members but also grow members is. And right now it's in this weird sort of middle period. Yeah. Let's talk about some of the changes they've implemented. One of them that I thought was interesting was that they started really focusing or centering their stylists, which as we've covered here at Modern Retail, there's been a lot of contention between the company and its stylists over the years.

18:22But now they include stylist photos in the boxes, which I thought this was interesting. It's helping boost engagement by 12%, which I think psychologically makes sense. I think if I open a box and see my stylist's photo, I'll probably want to go back and ask them some more things about my products or engage some more. But at the same time, they are also going to make some more changes. So soon customers are going to be able to order more than five items per box. This was sort of the, you know, what they were known for. You pick five items and then you choose what you want to keep after you try them on.

18:58The other thing is, which we've spoken about, I think, in the past is that they are trying to move away from third party products. So a lot of well-known brands that Stitch Fix partnered with and was selling like any other marketplace. They are now kind of going more in a private label or in-house brand direction, which, of course, as we know, is more profitable and just gives them more control over the assortment. But yeah, what are your thoughts on, you know, we'll talk about the new CEO, Matt Baer, and why he says it's going to take another couple of years for this to really bear fruit. Yeah, I mean, one of the things that I find really interesting is that there's a lot of tension between the stylists and Stitch Fix.

19:42And like we've covered and we've broken a lot of stories about how Stitch Fix has really changed the nature of the work for stylists, where some of them used to be full time, they used to be sort of very big part of the company culture, and it has been focusing less and less on that. And I think in January of this year, we wrote about how it just eliminated full-time stylists entirely and made them into more part-time workers, more gig-like. But the fact that the company is now saying that when you include a picture of the stylist, it helps boost engagement sort of goes against these cost-cutting moves that have been putting the stylists on the back burner.

20:19And so it'll be interesting to see how Stitch Fix is able to sort of juggle those two things where it seems like people do really like having that personal connection and having someone help choose their clothes. But at the same time, the company clearly has been focused on saving on costs and not having, you know, paying as much to have these full time workers who are part of the service. So I thought that was something that stood out to me. Focusing on in-house brands makes a lot of sense, but then takes a lot of work. I'm sure in the long run, it'll be better margins. But at the same time, you have to then get into the manufacturing and all that jazz with it.

20:52So we'll see how it goes. Yeah. So they'll soon be focused on growth. But, you know, this is coming off of also shutting down its UK operation last year and having mass layoffs. I think they also shut down a warehouse distribution center in Dallas, which also resulted in laying off hundreds of employees. But all of that helped shave about$100 million in expenses in 2024. So clearly it is working. But as the CEO said, this still puts them squarely in the build phase of the transformation. So which is why he says that it'll take until I think the end of fiscal year 2026 to to get back fully on track or at least to start growing consistently again.

21:40Yeah, no, it's, you know, kind of similar to the last segment we had where it's all about figuring out what costs you can cut and then paying down whatever debt or narrowing your losses. And then as the story goes, then you'll get back to growth. But growth is still a long way off before if you don't have, you know, a profitable and sustainable business right now. So that's what a lot of these companies are focused on is just getting back to sort of square one. So, yeah, it'll be interesting to see if this plan works out, though. shaving off$100 million in expenses, I'm sure does help things. Yeah.

22:15All right. Well, on that note, we can wrap things up. Please rate and review us on Apple Podcasts, Spotify, or wherever you're listening. You can also listen to the Modern Retail Podcast on Thursday to hear interviews with Kale, interviewing a lot of industry executives. Actually, speaking of Grove Collaborative, Cale, do you want to give us a preview? It sounds like you're going to be speaking to them next week. Yeah, no, it's fortuitous that we have this table setting for this because I spoke with Jeff Yerkeson, CEO of Grove Collaborative, for the next episode. We spoke about a lot of this, the focus on profitability, where he's setting his sights in terms of growth and just the overall vision for it.

23:00This was recorded before this latest Cash Infusion announcement, but there are certainly allusions to it. So definitely check it out. All right. Sounds exciting. And come back on Saturdays for more rundowns. Thank you.