If the plight of brick-and-mortar retailers was an apocalypse before the pandemic, it's hard to know what to call it now.
Much of the retail sector is facing an unprecedented threat from COVID-19, and bankruptcies in the sector continue to roll in. Ascena Retail Group, the parent of Ann Taylor and Lane Bryant, joined the Chapter 11 club last week, saying it would close up to 1,600 stores as part of a restructuring plan.
Other companies that have sought bankruptcy protection include J.C. Penney, Neiman Marcus, J.Crew Group, Tuesday Morning, and GNC Holdings, while others -- Zara, Men's Wearhouse parent Tailored Brands, and H&M -- have promised to close hundreds of stores.
While the crisis is a disaster for the apparel retail industry as a whole, the store closings, which could reach 25,000 this year according to Coresight Research, will put billions of dollars in market share up for grabs, setting up a sizable opportunity for businesses that can outlast the crisis. Three stocks that look well-positioned in this environment are Stitch Fix (SFIX -1.39%), Target (TGT -0.61%), and TJX Companies (TJX -1.55%), the parent of TJ Maxx, Marshall's, and Home Goods.
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Stitch Fix: An e-commerce winner
Clothes shopping in stores is a hassle in normal times, but during the COVID-19 pandemic, it's become especially undesirable. Consumer spending across all categories has shifted to e-commerce, and Stitch Fix, an online personalized styling service, seems set to benefit from that shift. Although the company saw sales decline in its most recent quarter, which ended in the beginning of May, it returned to growth that month and should continue to recover as the economy normalizes.
During the crisis, one of Stitch Fix's biggest advantages is its base of autoship customers, who get "Fixes" -- boxes of five items of clothing that they can keep or return -- on a regular basis, typically every month. That gives the company a reliable customer base that is happy to keep spending through good times and bad. CEO Katrina Lake highlighted the importance of this autoship cohort on the recent earnings call:
First, on autoship, the large majority of our clients choose to receive Fixes on a recurring basis, whether it's every two to three weeks or on a monthly or quarterly cadence. This provides us with tremendous visibility into forecasting demand trends, buying into inventory, and aligning our styling and warehouse workforces to fulfill that demand.
Lower advertising costs during the recession also give the company an opportunity to target new customers, and the company has launched a new Direct Buy option, giving shoppers the ability to skip the traditional Fix process and shop directly on the platform. It's easy to see why CEO Katrina Lake called the industry disruption a "huge market share capture opportunity."
Target: Always essential
Selling everything from groceries and apparel to home goods, electronics, and health and beauty products, Target is possibly the most diversified brick-and-mortar retailer around. And as an essential retailer with an active digital business that includes same-day delivery and pick-up options, Target is in a prime position to scoop up market share from struggling non-essential retailers, including the group above and others like Bed Bath & Beyond, which recently said it would close 200 stores.
Though apparel sales at Target declined during the lockdown period, the big-box chain was gaining momentum in the category prior to the pandemic. In the third quarter last year, apparel comparable sales jumped 10% as the company leaned on private-label brands like A New Day and Cat and Jack. Similarly, the company has gained market share in toys after remodeling its toy department in a number of stores and forging a partnership with Walt Disney. That should give Target a boost as toy sales have been up during the pandemic with so many kids spending extra time at home.
Finally, its locations, which are often in strip malls or street-side, tend to give it an advantage over struggling shopping malls, especially when combined with its digital capabilities, which can offer services like curbside pickup. In April, digital comps at Target nearly quadrupled.
TJX: The return of off-price
TJX took the lockdown period hard, shutting down its stores (as well as its websites) and furloughing over 100,000 employees. Revenue fell more than 50% year over year in the first quarter, leading to a nearly $900 million loss. Management even put the dividend on hold for the first half of the year.
However, since reopening its stores, TJX appears to be back on the mend. The company said in its fiscal first quarter earnings report that during the initial stages of reopening in May, sales were up year over year with "very strong" early results. TJX isn't particularly strong in e-commerce, but it does have a number of assets that are well suited to the current crisis. Its reputation for low prices is a clear advantage in a recessionary climate, and its inventory acquisition model, based on taking advantage of things like closeout sales and order cancellations, is set up to thrive during a time with so much disruption in the industry. Bankruptcies, store closings, and other inventory challenges at mall-based chains and department stores, therefore, all favor TJX and could help boost its profit margins as well.
Additionally, the company's locations, like Target, are generally found in strip malls and separate storefronts, giving it an advantage over many competitors as its stores make it easy for shoppers to get in and out. With its wide variety of merchandise in apparel and home goods and its bargain prices, TJX should be one of the few brick-and-mortar retailers that continues to draw steady traffic as its peers falter.
