As the coronavirus pandemic grinds on, the fates of various retailers hang in the balance. 

The TJX Companies (TJX 0.13%) and Stitch Fix (SFIX -2.81%) both sell clothing, but they occupy different spaces in the retail industry. The COVID-19 health crisis has hit consumer discretionary companies hard, and not all will recover quickly -- or at all. Let's evaluate which of these two stocks is the better buy right now, as we position our portfolios for when the crisis eventually passes.

Don't discount off-price retail

TJX is an international off-price retailer in clothing and home goods whose chains include T.J. Maxx, Marshalls, and Home Goods. On a recent earnings call, CEO Ernie Herrman characterized its stores as a "treasure hunt shopping experience." 

But during the COVID-19 crisis, TJX has gone into full defensive mode, withdrawing guidance for the next quarter and the fiscal year. It furloughed 286,000 employees and cut compensation for executives and board members through July 4. The company also shut down its online business for the time being.

Herrman said: "While we have been making decisions we would never want to make, we are living through a global pandemic. We are making every effort to prepare for reopenings, as soon as we believe we can operate safely in the communities we serve." 

Woman looking on in delight as someone cuts the tag off her new shirt.

Image source: Getty Images

In efforts to strengthen its financial position, TJX is drawing down $1 billion from its revolving credit facilities, suspending its share repurchase program, and considering suspending its dividend.

While we don't know when the crisis will end, we do know there will be a lot of surplus retailer inventory available for TJX to scoop up at bargain prices and resell at a nice profit. It's also likely that shoppers will prefer shopping at off-price retailers, such as T.J. Maxx and Marshalls, while recovering from a period of unemployment and great uncertainty.

This isn't just a theory — TJX's 43-year history provides a track record for how it's dealt with other crashes. Let's consider fiscal 2010, which followed the financial crisis of 2008-2009. Net sales for TJX that year reached $20.3 billion, up 8% on a 52-week comparable basis. Diluted earnings per share (EPS) were $2.84, up 48% on a 52-week comparable basis. Shoppers clearly gravitated toward value following a time of financial stress and hardship, and I think the same thing will happen as the economy recovers from the coronavirus shutdown.

Personal styling for the masses

Stitch Fix is an online personal styling service, using customer preferences and its own algorithms to come up with customized clothing shipments. It was founded in 2010 and went public in 2017, giving it about 10 years of experience. CEO Katrina Lake characterizes shopping with Stitch Fix this way: "Everything that we sell is one-to-one personalized."

On April 8, Stitch Fix withdrew guidance for next quarter and the fiscal year. In a special call the same day, Lake said that while three of the six distribution centers the company uses had been closed temporarily, all were now open -- though staffed on a volunteer basis, causing fulfillment delays. She reported overall softness in demand due to lower conversion rates of new customers but said longtime customers are continuing to order. 

Lake said in a statement:

We believe our business remains well positioned to succeed long term. Stitch Fix has been cash flow positive since 2014, with a long history of strong unit economics. We believe this foundation, and our unique personalization capabilities, coupled with a convenient at-home model that offers an obvious advantage in the new reality ... effectively positions us for the future.

Up until the coronavirus hit, Stitch Fix was increasing its customer base and revenue per customer. In the quarter ended Feb. 1, the company reported a 17% increase year over year in active customers, and revenue per customer that increased 8.2%. Sales were up 22% year over year for the same quarter. So the company was striking the right chord with consumers and growing nicely. 

But it seems likely that a big business contraction is coming, if it isn't here already, as recession and unemployment raise their ugly heads. It seems unlikely that the selected-for-you clothing segment will grow if consumers are struggling to pay bills. Or if they no longer have jobs to dress up for.

The final verdict

As of midday Friday, TJX sports a price-to-earnings (P/E) ratio of 18, while Stitch Fix has a P/E of 63. TJX's stock price has declined 23% since the market peaked on Feb. 19, while Stitch Fix has declined 45%. The consumer environment is in a state of flux, and financial pressures will probably work against the more richly valued company, Stitch Fix.

TJX performed very well as the U.S. recovered from the Great Recession. The off-price retailer is poised to attract shoppers, hungry for new styles but at value prices, as soon as retail is allowed to reopen. TJX is ready to procure and sell fresh fashion, taking inventory off the hands of manufacturers and retailers, presumably at fire-sale prices. And it isn't completely dependent on fashion, as its HomeGoods stores contribute an entirely different product mix.

While the economy doesn't look good for retail in the short run, and either stock could keep declining, I think Stitch Fix will take much longer to recover than TJX, and will probably fall further. I think TJX is the better buy now and for the foreseeable future.