There's no question that COVID-19 has clobbered the apparel industry.
According to the U.S. Census Bureau, sales at clothing stores in March fell 50% from a year ago, and then plunged 89% year over year in April as the vast majority of non-essential shops across the country were closed.
The pandemic has led solidly profitable retailers like Macy's and Gap to seek emergency financing to weather the crisis, and even skip out on rent, prompting a lawsuit from mall landlord Simon Property Group against Gap.
Stitch Fix (SFIX 13.77%), the online-only personalized styling service, did not escape the COVID-19 malaise as revenue fell 9% in its third quarter, which ended on May 2. However, the company's results and management commentary make it clear that the apparel disruptor is well-positioned to capture market share in the coming months as the already struggling apparel industry faces an unprecedented upheaval from the pandemic.
A unique opportunity
With stores closed for about half of the quarter, even healthy brick-and-mortar chains like Macy's, Gap, and TJ Maxx parent TJX Companies, the country's biggest apparel retailer, saw quarterly sales fall by around 50%.
For a few struggling apparel retailers, meanwhile, the pandemic has been a coup de grace, forcing a number of them to file for Chapter 11 bankruptcy protection, including J.C. Penney, Neiman Marcus, J. Crew, and Stage Stores. Others are teetering on the edge of insolvency, such as Ascena Retail Group and Tailored Brands, which own thousands of apparel stores across the country.
Those bankruptcies will lead to the closing of thousands of stores and put billions of dollars of market share up for grabs. Coresight Research estimated that as many as 25,000 retail stores could permanently close this year, with apparel and department stores among the biggest victims.
Even some of the most successful apparel retailers are retrenching. Nordstrom, one of Stitch Fix's closest competitors, said recently it would close 19 stores, including 16 full-line department stores and all three of its Jeffrey boutiques.
In an overstored industry that was already moving toward e-commerce, the pandemic is accelerating the transition to online, and that provides a clear benefit for online operators like Stitch Fix.
Stitch Fix's move
Though Stitch Fix stock fell on its recent earnings report as the company missed estimates on its top and bottom lines, the underlying business fared better than it may seem. Demand was solid through the quarter, but supply chain issues hampered its performance as the company temporarily shuttered three of its six warehouses and ran them below capacity when they were reopened in order to keep employees safe. However, management believes that sales would have increased in the quarter had it not been for those supply chain challenges, and positive revenue growth returned in May. Looking ahead, growth should continue to ramp up as the economy reopens.
In addition to the tailwinds from the reopening and pent-up demand, Stitch Fix has a golden opportunity to capture market share. The company has a strong balance sheet, finishing the third quarter with no debt, and it recently opened a $90 million credit facility to allow it to "play offense," making strategic investments at a time when many of its competitors are flailing, if not folding entirely.
On the earnings call, management made several references to playing offense in order to take advantage of what CEO Katrina Lake called "a huge market share capture opportunity."
President Elizabeth Spaulding added:
With the major dislocation we are seeing right now in retail, we have the opportunity to dramatically accelerate share shift to Stitch Fix. We believe that more than $30 billion [of overall sales in the retail market] will rapidly shift online, which is 3 times what we would typically see in one year.
For a company with less than $2 billion in annual revenue, that offers a huge market share grab, and Stitch Fix isn't standing still waiting for it to come.
Stitch Fix is accelerating its Direct Buy rollout and opening up the program to customers who have not yet purchased an item from a Fix (what the company calls the shipped box of five stylist-selected items that make up its core business). Now, customers will be able to use Direct Buy just by filling out their style profile, which should greatly expand its market and help the company acquire new customers, as only a certain percentage of consumers are going to be interested in the Fix model.
Management is also aggressively hiring engineers to create the new product experience, and the company plans to ramp up marketing to support it.
Stitch Fix had previously announced a long-term revenue growth target of 20% to 25%, and it may take the company a few quarters to get back to that pace given the other challenges with the pandemic, which include a lack of reasons to buy new clothes, such as social occasions and going into an office, and the economic impact of the recession we're now officially in.
However, the company is poised to capture market share as its brick-and-mortar rivals falter, and it's improving its value proposition with the Direct Buy program. Given that momentum, the company should emerge from the crisis in a much stronger competitive position.