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Better Buy: Lululemon vs. Stitch Fix

By Leo Sun – Jun 13, 2020 at 1:00PM

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Which retail apocalypse survivor is poised for stronger growth this year?

Lululemon (LULU 0.73%) and Stitch Fix (SFIX -3.06%) both weathered the retail apocalypse in unique ways. Lululemon's focus on high-end yoga apparel and community events locked in shoppers, while Stitch Fix carved out a niche in online apparel sales with its unique styling service and algorithm-powered recommendations.

Lululemon's stock rallied 400% over the past three years as it dazzled investors with its robust comparable-store sales growth. Stitch Fix has advanced about 65% since its IPO, but it struggled with concerns about its slowing growth and high expenses.

A group of women attend a yoga class.

Image source: Getty Images.

Will Lululemon continue to outperform Stitch Fix over the long term? Or will the styling service stabilize its business and bring back the bulls?

How fast is Lululemon growing?

Lululemon's revenue rose 21% last year as its earnings grew 37%. It's generated nine straight quarters of double-digit comps growth, fueled by the expansion of its direct-to-consumer channels (which generated 29% of its revenue last year), the expansion of its menswear business, brand loyalty it's built with community events like free yoga classes, and its steady premium appeal, which it's maintained with limited promotions.

Lululemon believes its "Power of Three" growth plan can generate double-digit annual revenue growth through the end of 2023 by doubling its men's revenue, doubling its digital revenue, and quadrupling its international revenue.

Lululemon didn't provide any guidance for fiscal 2020 due to uncertainties regarding COVID-19. Analysts expect its revenue to rise 2% this year as its earnings dip 11% -- but they expect it to rebound with double-digit top- and bottom-line growth next year. During last quarter's conference call, Lululemon declared it was still on track to hit its "Power of Three" goals.

How fast is Stitch Fix growing?

Stitch Fix charges customers a one-time styling fee of $20, then sends packs of five items to each customer. Customers pay for the items they want to keep and return the rest for free. If they keep at least one item, the styling fee is deducted from the price; if they keep all five, they receive a 25% discount.

A woman removes clothes from a box.

Image source: Getty Images.

Stitch Fix's number of active clients grew 9% annually to 3.42 million last quarter, as its net revenue per annual active client rose 7% to $467.

But this business model is wobbly, since high fulfillment costs and promotions make it tough for Stitch Fix to generate consistent profits, especially as larger retailers launch similar services. Stitch Fix's revenue rose 29% in fiscal 2019, which ended last August, but its net profit fell 18%. In the first nine months of 2020, its revenue rose 11% year-over-year, but its net profit reversed to a net loss.

Stitch Fix also didn't provide any guidance due to COVID-19, but analysts expect its revenue to rise 7% this year and 16% next year, even as its earnings remain deep in the red.

The fundamentals and valuations

Lululemon ended fiscal 2019 with 491 stores, up from 440 at the beginning of the year, making it one of the few apparel retailers to consistently expand its brick-and-mortar presence throughout the year.

It ended the year with $1.1 billion in cash and equivalents and no long-term debt, which gives it a comfortable cushion against the near-term headwinds. Lululemon's stock is a bit pricey at 75 times forward earnings, but its strengths arguably justify that premium valuation.

Stitch Fix ended last quarter with $329 million in cash, cash equivalents, and short-term investments, and no debt. It expects its gross margin to improve as the COVID-19 crisis passes, but its operating expenses could remain elevated.

Stitch Fix's stock can't be valued by a P/E ratio due to its lack of profits, but it trades at just 1.5 times this year's revenue forecast. However, it's arguably cheap because it won't resolve its slowing growth, lack of profits, or competitive threats anytime soon.

The clear winner: Lululemon

Lululemon's valuations are frothy, but its brand appeal, robust comps growth, and ambitious long-term goals make it a stronger overall investment. Stitch Fix still hasn't proven its business model is built to last yet, and it won't become an appealing investment until it scales up to stabilize its earnings growth.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Stitch Fix. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Stock Quote
Lululemon Athletica
LULU
$310.05 (0.73%) $2.25
Stitch Fix Stock Quote
Stitch Fix
SFIX
$4.43 (-3.06%) $0.14

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