Apparel stocks are showing signs of life after getting crushed this year thanks to the coronavirus. The employment situation in the U.S. has been improving in recent months, and consumers are showing a greater willingness to spend. It was great news for retailers that Cyber Monday sales in the U.S. reached a record high of $10.8 billion this year, according to estimates from Adobe Analytics.
With COVID-19 vaccines on the horizon, apparel stocks could be on the verge of taking off in 2021. Here are two stocks that have significant upside.
Revolve your stock portfolio
Revolve Group (RVLV -1.83%) calls itself the "next-generation fashion retailer for millennial and generation-Z consumers." The company has been around for 17 years and just completed its initial public offering in 2019. Although the pandemic pressured sales, Revolve has the makings of a great growth stock, with revenue nearly doubling between 2016 and 2019. Most importantly, the business was growing at fast rates while producing a healthy profit.
Sales were hit hard in the second quarter, falling 12% year over year, but superb inventory management allowed the business to grow profits by 12%. The third quarter showed the business heading in the right direction with sales down just 2% year over year, while net profit more than doubled.
The stellar performance on the bottom line highlights an important competitive advantage. Revolve connects shoppers with hundreds of brands and social influencers, and it relies on data analytics and algorithms to identify patterns so that inventory is always on trend. This drives faster inventory turnover, which is a key reason why the company was able to report a profit even with sales down.
One thing investors should know is that Revolve depends on healthy demand for fashionable clothing, and there's less demand for new outfits unless people are going out. That means a prolonged pandemic is a risk, but that's also why the stock could have big upside next year if vaccines become available and social-distancing requirements ease.
However, with its nimble inventory strategy, Revolve does have the ability to shift its assortment to other categories that are relevant in the current environment, such as comfortable leisure apparel for the home.
What's more, Revolve is already building up inventory in anticipation of pent-up demand, and the stock is not that expensive. The shares are currently up 35% from their IPO price and have marched steadily higher since hitting a bottom in March. Further improvement in sales and profits should support a higher share price in 2021.
The stock trades at 35 times next year's consensus earnings estimate as of this writing -- Revolve's future growth prospects can support that valuation.
It's getting Canada Goose cold
Canada Goose (GOOS 1.29%) has emerged as not only a top brand for performance outerwear in freezing weather but also as a leading global luxury brand for winter apparel. The Canada Goose patch on its down-filled jackets has become synonymous with quality and "made in Canada."
Like Revolve, Canada Goose was growing at fast rates prior to the pandemic. Between fiscal 2016 and fiscal 2020, sales soared from 291 million to 958 million Canadian dollars. A focus on operational improvements and growth in the higher-margin direct-to-consumer channel sent profits up even faster, reaching CA$152 million in the year ended March 29, 2020.
Store closures earlier in the year caused sales to fall 40% in the first half of fiscal 2021, but recent performance has been encouraging with China seeing a more than 30% year-over-year increase in sales in the most recent quarter and the digital business starting to accelerate.
The COVID-19 situation remains volatile in Europe and the U.S., so Canada Goose isn't out of the woods yet. But management believes the brand is more relevant than ever as people look to spend more time outside.
The winter is peak selling season for Canada Goose, and management expects to see improvement in its wholesale business in the holiday quarter, as well as continued strength in e-commerce. The company just rolled out an omnichannel shopping experience at its U.S. stores, which CEO Dani Reiss expects will convert more shoppers.
The stock sells for 31 times its fiscal 2020 earnings. That looks like a steal for a retail stock that is capable of growing revenue at double-digit rates in a healthy economy, especially when it can convert those sales into goosedown-filled profit margins.