As American closets overflow with clothing, how does an apparel retailer convince consumers they need even more? According to a report by relocation company Movinga, 82% of the clothing in Americans' closets has been unworn for a year, and last year, Morgan Stanley wrote that people own so much clothing that a new purchase doesn't even bring with it a feeling of happiness.

Pink and ecru women's ankle boots, handbag, scarf, and belt with fall leaves are spread on a cream-colored surface.

Image source: Getty Images.

Against this backdrop, retailers are trying to win customers with discounts and integrated online and in-store experiences, while they work to make their own processes as efficient as possible and cut costs. The picture might look grim for apparel retailers, and you might wonder how any particular one can rise above the rest. Well, The RealReal (REAL -6.07%), Stitch Fix (SFIX -4.15%), and Target (TGT -3.04%) are three names that are doing just that. By appealing to issues that are most important to today's consumer, they are winning over those shoppers today and driving the retail experiences of tomorrow.

The RealReal and sustainability

Last year, The RealReal, an online luxury consignment shop, was the first among its competitors to go public. In a world where the focus is turning more and more to avoiding waste, consumers love the idea of putting their unwanted clothing up for consignment and buying new items the same way.

A report by Global Fashion Agenda and The Boston Consulting Group showed that the amount of waste produced by the fashion industry is set to total 148 million tons by 2030 -- that's a 60% increase from 2015. The RealReal, in its 2019 Luxury Resale Report, said that 82% of customers consider sustainability an important reason why they shop there, and a CGS survey shows that one quarter of consumers care about sustainability when buying apparel.

The RealReal has seen the results from those consumer preferences materialize in its sales growth. Revenue was up 55% in 2018, and through the first three quarters of 2019, the top line grew 52% year over year to $220.7 million. Active buyers also increased 43% over the trailing 12-month period, and average order value in the third quarter of 2019 was up 4.8% year over year to $438.

Though The RealReal faces online and brick-and-mortar competition, the market size leaves room for a variety of players. Rival company ThredUp said the 2018 secondhand apparel market enjoyed $24 billion of sales, and that figure should reach $51 billion by 2023.

The RealReal has actually seen its share price slip 37% since its market debut. Concerns over the company's product authentication process weighed on the stock this past fall, and though the company is growing quickly, it's far from profitable with a $2.28 loss per share in first three quarters of 2019. The bottom line is improving with the third-quarter loss coming in at just $0.30 per share, but cautious investors might want to see if The RealReal can get closer to profitability before taking the plunge.

Stitch Fix and personalization

Stitch Fix, which strives for personalized shopping experiences, asks customers to complete an online questionnaire before preparing a box of clothing and accessories to be delivered to the shopper. The customer can then choose which items they wish to keep from the delivery.

In a market where clothing purchases are often unnecessary and end up as yet another unworn garment in the back of the closet, personalization could make a big difference. An Epsilon survey shows that 80% of consumers are more likely to buy an item when the experience is personalized, and 90% of consumers find personalization attractive. Nearly 70% of millennials -- the group that makes the biggest number of apparel purchases per year -- expressed interest in personalized recommendations, according to an Accenture report.

Stitch Fix's own emphasis on personalized offerings is helping the company attract more customers as active clients climbed 17% year over year to 3.4 million in the most recently reported quarter. That was accompanied by 21% revenue growth to $444.8 million. The company's "direct buy" initiatives like "Shop Your Looks" -- which allows customers to buy products directly from the website -- have proven to be nice complements to the personalized deliveries. Stitch Fix said non-apparel items like handbags, often an unplanned purchase, generally make up less than 10% of revenue from the traditional orders but represented more than 20% of "Shop Your Looks" revenue in the quarter.  

That strength extends to the bottom line where Stitch Fix has reported a net profit in three of its past four reports, and earnings have topped analysts' estimates each time. Shares have experienced a lot of volatility since making their public market debut in 2017, but Stitch Fix remains an innovative retail play for 2020 and beyond.

Target goes for inclusiveness and affordability

This month, Target is launching All in Motion, its own activewear brand, after listening to the needs of about 15,000 customers around the country. The brand is "size inclusive" -- products are meant for all stages of the customer's fitness journey. Target isn't aiming for professional athletes and isn't featuring them in its advertising, so people can relate to the models in Target's promotional media.

Medallion Retail, a consultant, predicts that inclusiveness will be a long-term priority and recommends retailers plan their campaigns and displays accordingly. An Accenture report shows roughly 40% of shoppers have shifted some of their business away from retailers that don't reflect how important inclusiveness is to them.

And Target gets extra points for affordability, which is almost always a positive for the consumer. This product line is just one initiative, representing a small sliver of Target's offerings, but it reflects the forward-moving spirit of the company. And Target has a proven track record of success with its more than 40 private-label brands, including multi-billion dollar kids clothing brand, Cat & Jack. These owned and exclusive brands represented a third of sales in 2018, and in Target's third-quarter earnings call, chief financial officer Michael Fiddelke said the growth of owned brands over time has been a positive for profit margins. 

So what does this mean for investors?

The RealReal, Stitch Fix, and Target have each shown that they can grow their businesses and better connect with their customers by recognizing what's important to them. That makes them retail stocks to watch this year and good ways to bet on the future of the industry.