Brick-and-mortar fashion retailer Gap's (GPS 5.59%) stock is back in fashion with investors, up 24% in the past three months, even though sales from its clothing line are still underwhelming. At the same time, e-commerce-based fashion retailer Revolve Group's (RVLV 1.96%) stock is out of favor, down 4.4% over the same three months, as it faces its own struggles.
Which one of these fashion retailers is the better opportunity?
The case for Gap: On the way back up
Gap's business has been in a slump for years now. It was the king of American fashion throughout the 1990s, but it has been "out of fashion" as a prime retailer for roughly two decades. Gap has had some highs and lows since then and it's been through a string of CEOs in efforts to revive the business without much success. Sales levels in 2022 were almost exactly what they were literally 20 years ago, and profits have evaporated.
GPS Revenue (TTM) data by YCharts
Gap stock is down 43% over that two-decade time frame, while the broader market has gained 360%.
Some investors pinned hopes on Sonia Syngal, who propelled Gap's Old Navy brand to strong sales and public popularity, and she took over the CEO job in 2020. She led the company through the rough beginning of the pandemic, but without any tangible progress since then, she was replaced last year. The company took its time in bringing in a new leader, and it only recently announced that Richard Dickson, the former COO at toy company Mattel, would take over the CEO role. This news is like the spark for the recent positive reaction from the market.
Can Dickson do any better than his predecessors? That's to be determined. It'll be a tough climb, though. The core struggle is that Gap's various brands have lost relevancy as fashion trendsetters. It also doesn't help that new management hasn't been able to create a clear vision for the company. To become stronger, Gap needs a real overhaul in its branding and mission at the very least, and each of its brands should have clear differentiation. In the current uncertain retail environment, it will be even harder to do.
Buying Gap stock now is taking a chance on a turnaround story, and those are rare. But sometimes that's where the greatest opportunities lie.
The case for Revolve: In with the new
Revolve Group is the anti-Gap. In contrast with Gap's well-priced basics, Revolve sells expensive, trendy fashion on its websites, which include the haute fashion site FWRD. It has no physical stores and works through social media, influencers, and pop-up parties.
It also uses artificial intelligence (AI) to inform inventory management and product design, which has helped it lower inventory as spending slows so it can maintain efficient profitability. It's also using AI to design its owned brands, which gives it greater flexibility with inventory management and pricing, even as it can meet popular trends within its client base.
While there was strong momentum leading up to the pandemic and even more at the beginning of the pandemic, there's been a slowdown as consumers wrestle with outsized inflation. Despite sales declines, though, Revolve continues to increase its active customer base and maintain profitability.
Compare its sales and income growth since becoming a public company with Gap's performance over the same time frame.
RVLV Revenue (TTM) data by YCharts
Which stock is a better opportunity right now?
I would stay very far away from Gap stock right now. Anyone buying this stock is taking a real risk, and it doesn't look like the rewards would be worth it. There are much better stocks out there, including Revolve.
Revolve is feeling the impact of the current macroeconomic climate, but it's well-positioned to bounce back in a better retail environment. It's the trendy apparel company that Gap wants to be, but the spot's already taken. If I had to wager which one of these stocks has the potential for a stronger rebound, I would place my money on Revolve.
