With about two million vaccines administered as of this writing, and a goal to reach 200 million by mid-2021, the end of the COVID-19 pandemic in the United States looks to be in reach. Due to the pent-up demand for social events like concerts and weddings, certain parts of the economy should enjoy a strong tailwind heading into the summer.
Fashion apparel is one of these sectors. Investors should look closely at Revolve Group (RVLV 1.78%) and Stitch Fix (SFIX) as two quality businesses that will benefit from this rebound.
Image source: Getty Images.
Stitch Fix
Stitch Fix -- the self-described "online personal styling service" -- combines its proprietary algorithms and human stylists to send customers clothes, shoes, and accessories in packages the company calls fixes. Customers receive fixes through the mail, try on the items, and only pay for what they keep. Shipping and returns are free, while the $20 styling fee Stitch Fix charge gets deducted from a customer's bill if they keep one or more items.
In its fiscal 2021 first quarter (ended Oct. 31), Stitch Fix reported $490 million in revenue, up 10% year over year. Active clients hit 3.8 million, also up 10%. The apparel industry as a whole is projected to decline 1.9% in 2020, which shows that Stitch Fix is doing well even with market headwinds.
Wall Street cheered the latest results, driving the stock up over 75% since the report. With these recent gains, individual investors might be concerned they've missed the boat. However, with a market cap under $7 billion and an estimated $2.1 billion in fiscal 2021 sales, that is modest premium to pay if you believe the business can grow for years to come.
One thing investors need to watch with Stitch Fix is the growth in marketing spend as a percentage of revenue. In 2018, this number was 8%, but last quarter, it grew to 11%, an indicator that the company now has to spend more to acquire customers. While not detrimental to the business, if advertising expenses continue to grow, that will potentially put a ceiling on profitability.
Revolve Group
As an online retailer focused on premium women's apparel, demand for Revolve Group's core products has cratered in 2020. In its latest quarterly report, the company stated that demand for dresses and skirts (its bread and butter) continue to struggle due to almost all social events being canceled this year. This led overall sales to decline 2% year over year in the third quarter.
However, with 100% growth in beauty products and efficient inventory management, the company actually grew its free cash flow 86% to $13.9 million. Like Stitch Fix, this is very impressive when you consider the challenges the company has faced in 2020.
The surprising resiliency of Revolve Group has led to some bullish attention from investors. Shares recently crossed the $30 mark after trading below $8 in March, and the stock is up 66% year to date as of this writing. With a market cap of just $2.1 billion, and a 25 times trailing 12-month EBTIDA valuation multiple, the stock doesn't look expensive, especially if demand for its core products pick back up in 2021.
Something that could trip up Revolve's momentum is the current economic recession. Unlike some of Stitch Fix's products, which are more focused on everyday outfits, Revolve leans heavily into the discretionary category. If unemployment stays high, leaving consumers with less disposable income than expected in 2021, people may hesitate to buy a new $200 dress.
Overall, Revolve Group and Stitch Fix represent two companies in the apparel industry that are trading at reasonable prices and are well-positioned heading into 2021. If investors want exposure to online retailers with business models set up for the post-COVID world, these two stocks will do the trick.
