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The 2 Top Stocks in Retail Apparel

By Bradley Freeman - Nov 24, 2020 at 7:43AM

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Why these two stocks are poised for long-term success.

The retail apparel industry was upended by the current pandemic. Stores deemed "non-essential" were forced to shutter and business suffered greatly as a result.

Still, there will be winners in the space that are capable of quickly evolving with these disruptive times. The retail industry will not cease to exist, and the pain experienced by some could be a long-term gain enjoyed by others. Here, we will explore two probable winners: Nike ( NKE 1.41% ) and Revolve Group ( RVLV 5.37% ).

A hung-up row of shirts in all different colors.

Image source: Getty Images.

Nike's digital evolution

When considering iconic, globally ubiquitous brands, it's hard to overlook Nike. Over the past several decades the company has transformed itself as among the most valuable fashion brands in the world, and that is not by accident.

Nike has always searched for ways to improve and streamline operations, as well as to innovate within its categories. That drive has served the company extremely well during a tough year.

Despite some Nike wholesalers -- like malls and department stores -- being closed during its fiscal first quarter (June to August 2020), its sales fell by just 1% year over year. The muted decline was significantly aided by digital sales growing by an eye-popping 82% -- very timely in a world of social distancing.

This success is encouraging on several levels. First, it shows Nike's distribution does not depend on third party vendors. Instead, it can shift to alternative channels when an event like COVID-19 pushes the company to do so.

Furthermore, the outsized growth in digital sales gives the company a more granular view of its inventories by removing an intermediate step between itself and customers. It expects this improvement to lead to greater operational efficiency overall.

Those efficiency gains also directly contribute to margin expansion. Gross margins on Nike's digital revenue are 10% higher than with wholesale, and CEO John Donahoe believes this advantage will grow as the transformation continues.

While COVID-19 has certainly been difficult for Nike, it has made the necessary moves to overcome the pain. This will lend itself to an even stronger company in the years ahead.

Revolve is poised to thrive

The online retailer Revolve Group has also struggled during the pandemic. As a 2019 IPO and a small-cap, it is a much different investment than Nike, but a compelling play nonetheless.

The company is digitally native, but leans somewhat heavily on live events (concerts, festivals, etc.) to market its products and to drive sales. Additionally, two of its largest categories -- dresses and skirts -- have been immensely hard-hit by stay-at-home orders.

Despite all of this, in its most recent quarter (July to September 2020), Revolve's revenues fell by just 2% and its total customers grew by 5% year over year. As we dig deeper into the financials, however, it becomes clear just how well management has handled the global pandemic.

Gross margin for Revolve expanded 170 basis points year over year to 55.3%, and profit improved rapidly. Net income more than doubled to $19.4 million, net cash provided by operations spiked 57% to $14.3 million, and free cash flow soared 86% to $13.8 million.

How did the company manage to generate so much profit growth while sales remained held back by COVID-19?

A better external promotional environment helped, but it goes deeper than that. Revolve leaned on its proprietary inventory program to fight off supply gluts. It boasts an automated platform enabling a bird's-eye view of the company's production and inventory.  This way, Revolve makes decisions based on real-time demand rather than subjective opinions. Revolve refers to this process as "read and react" -- it clearly served the company's operations well amid COVID-19.

Sales should improve as the pandemic ebbs and the world slowly gets back to normalcy. Whenever that happens, the combination of protocols put in place to boost profitability, as well as the improved demand, should be bullish for Revolve.

Both are strong picks

Clothing companies were not spared the pain COVID-19 inflicted upon countless businesses. Still, these two organizations have proven themselves flexible enough to overcome historically difficult times. As the world begins to move past the pandemic, keep Nike and Revolve on your radar and consider them as quality, long-term investments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
$171.29 (1.41%) $2.38
Revolve Group, Inc. Stock Quote
Revolve Group, Inc.
$69.92 (5.37%) $3.56

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