COVID-19 vaccinations are a big catalyst in the near term for apparel stocks. As more people get vaccinated and the economy starts to get back to normal, the demand for apparel from those who want to get back out and socialize has the potential to accelerate. But some apparel brands are better positioned to take advantage of this than others.
The assumption would be that shoppers are going to return to brick-and-mortar stores, but I believe the best apparel stocks to buy right now are actually the companies that exclusively serve online shoppers. The reason is that online apparel spending is growing much faster than shopping in stores. One estimate calls for online spending to make up nearly half of the total apparel industry by 2025.
That's why Stitch Fix (SFIX -1.79%) and Revolve Group (RVLV 0.32%) are two stocks to buy before everyone is vaccinated. Let me explain.
Image source: Stitch Fix.
1. Stitch Fix
Stitch Fix is playing the role of disruptor in the apparel industry. It uses algorithms to deliver a personalized styling service for its growing base of 3.9 million active clients. Founder and CEO Katrina Lake started the company in her apartment while attending Harvard in 2011. Over the last four quarters, Stitch Fix generated $1.8 billion in revenue.
However, the stock price has lost about half of its value in the last month. The company missed revenue estimates in its latest earnings report due to carrier delays related to COVID-19. It also issued a lower-than-expected outlook for the full year, as the company said it was delaying the launch of its direct-buy service to spend more time working on certain features.
It's these short-term issues that are giving investors a chance to own a great growth stock at a discounted price. Despite the revenue miss, active client growth accelerated to 12% year over year, and management expects to add more clients through the rest of the year. Before the pandemic hit a year ago, Stitch grew active clients 17% year over year, driving revenue up 22%. That is where the business is likely headed as more people get vaccinated.
"As the country begins to reopen and the broader environment normalizes, we believe overall demand for apparel will increase and we'll be incredibly well-positioned to win," Lake said during the company's recent earnings call.
There is a massive opportunity for this relatively new upstart to gain more market share over the long term in the apparel industry. The reopening of the economy could jump-start that opportunity for Stitch Fix.
Image source: Getty Images.
2. Revolve
Revolve is a leading online apparel platform that primarily targets millennials and Gen Z shoppers. It's dependent on people going out and socializing, so everyone staying at home wasn't good for business last year. However, like Stitch Fix, this was a fast-growing business prior to the pandemic with tremendous long-term growth potential.
In 2019, Revolve posted an increase in revenue of 21% year over year, but growth decelerated to a decline of 12% in the second quarter of 2020. Recently, sales trends have shown significant improvement. The company reported a revenue decline of 5% in the fourth quarter, positioning it for a strong rebound when normal social activity returns.
One reason I really like the stock is that Revolve proved to be a well-managed business during the downturn. Management made improvements to operating efficiency, leading to a net profit increase of 59% in 2020.
It's no wonder the stock price has already tripled off the lows from last year. As co-CEO Mike Karanikolas said during the recent earnings call, "[W]e are primed and ready for the reopening of the economy." He noted that business trends are already up slightly year over year in the first quarter.
There could be a strong rebound in store for Revolve, but don't let the stock's recent run keep you from buying shares. The company is even smaller than Stitch Fix, with only $580 million in revenue. Revolve has plenty of upside in the $127 billion online apparel market that could deliver big gains for investors.
Investor takeaway
I believe the COVID-19 vaccines are a near-term stepping stone for Stitch Fix and Revolve to capture a growing share of the apparel market. All told, both stocks could be home runs over the next decade.
