E-commerce was on fire in 2020 with many stocks in the industry increasing by triple-digit percentages. With effects from the pandemic ongoing and unlikely to disappear anytime soon, shopping on the web could be in for another big year in 2021.
But one area that underperformed in the last year was apparel, especially brick-and-mortar clothing and department stores. Stuck at home, consumers were in need of far fewer threads than before. Things could start to improve for this beatdown area of retail in the next year, however, and Stitch Fix (SFIX -4.44%) should be one of the top ways to ride the rebound.
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A gem among so many stones
Barring a massive revision to the upside, retail sales for apparel and accessories are going to end 2020 down nearly 30% year over year according to the U.S. Census Bureau -- even worse than the nearly 20% drop in sales for the also-beleaguered restaurant sector. Remote work and a new self-employment trend are altering consumer behavior in this shopping category, and it's unclear when and how clothing sales will make a comeback.
Nevertheless, Stitch Fix's data-driven shopping experience is a standout in an otherwise ugly sector. It bottomed at a 9% year-over-year revenue decline during its fiscal 2020 third quarter (the three months ended May 2, 2020), which still represented a massive outperformance relative to its peers. Sales have come roaring back since then as the company reported 10% year-over-year growth in the first quarter of fiscal 2021 (ended Oct. 31, 2020). And throughout the pandemic, Stitch Fix has continued to grow its client base at an approximately 9% to 10% pace.
Now that the economy is adjusting to the new normal, Stitch Fix looks like it will continue to shine. Management's updated forecast for the rest of the current fiscal year calls for sales growth of 20% to 25%, implying a big acceleration from the most recent results. Clearly, all of the new customers it picked up in the last year (total active clients stood at 3.76 million as of Oct. 2020, up from 3.42 million a year ago) are expected to contribute as Stitch Fix grows at the expense of its peers in the apparel industry -- and consumers start spending on clothes again.
Better than just a rebound story
Even after the COVID-19 pandemic is beaten, I think e-commerce is unlikely to lose the gains it has made against traditional retail. Stitch Fix's own outlook indicates as much. Currently priced at 3.5 times trailing 12-month sales, this stock could be a real value in the clothing and accessories space if the company's expectations prove accurate.
Beyond the pandemic, though, there are some interesting prospects for Stitch Fix. At the moment, the company's growth strategy is centered on acquiring new customers (it's only just begun to expand abroad) and entering new markets (like with its direct-buy tool, as opposed to a curated collection of clothing picked by a stylist). Longer-term, though, Stitch Fix's data and machine learning capabilities, which helped the company get to where it is today, could be a real competitive advantage if it decides to make a foray into new clothing categories and beyond. In fact, the statement "transforming the way people find what they love" was featured prominently during the company's investor update in December.
Put another way, Stitch Fix has a lot of options when it comes to its future business direction. For now, though, its performance during the worst of the pandemic and strong outlook for 2021 make this my top apparel stock. I'll be making an initial purchase soon in the hopes of a rebound in the clothing industry, but plan to hold long term, as this could be a future leader in retail as e-commerce reshapes the economy.
