According to the U.S. Census Bureau, clothing and accessories sales were one of the hardest-hit businesses last year during the start of the pandemic. But with the economy reopening, pent-up consumer demand for some new threads is exploding. Through the first five months of 2021, apparel sales are up 81% year over year, making it retail’s fastest-growing segment at the moment.
It’s going to be a big year for companies in this space, where three of the hottest stocks right now are lululemon athletica (NASDAQ:LULU), Stitch Fix (NASDAQ:SFIX), and Skechers (NYSE:SKX). Here’s why they’re a buy.
Lululemon: More than an exercise niche play
This company, which started by selling yoga clothes before turning to general athletic wear, is one of the fastest-growing in the clothing and apparel business. Though it lost a little momentum in 2020, not even the pandemic was able to break Lululemon. And now that the company is lapping the effects from lockdowns last year, it’s setting a torrid pace of expansion once again.
Sales in the first quarter of 2021 were up 88% year over year and up 57% to $1.23 billion from the same pre-COVID-19 period in 2019. Gross profit margin was also up (57%, compared to 51% in 2020, and 54% in 2019) as newer categories like men’s clothing grew to a more profitable scale. And though there were challenges with shipping and supply chain logistics due to the massive surge in consumer spending so far this year, the bottom line still notched a healthy increase, too. Net income was up 50% from the same period in 2019 to $145 million.
Lululemon is a top e-commerce retailer these days, with over 44% of revenue pegged as direct-to-consumer sales. International expansion is also continuing at a solid pace, with revenue outside of North America growing 125% in the first quarter. Clearly, this athleisure brand is winning over plenty of shoppers around the globe, and the new normal (remote work, a higher rate of self-employment, and less time overall at the office) favors the athletically-inspired looks Lululemon turns out. The company expects sales to be up at least 32% this year to no less than $5.83 billion.
Based on the outlook, shares trade for about 51.5 times expected 2021 adjusted earnings per share. It’s a steep premium, but Lululemon has established its growth story and is a top name in apparel retail. If double-digit percentage sales increases can continue beyond this year, and as the bottom line improves, it’s worth it to pay up for the stock.
Stitch Fix: A tech firm that happens to sell clothes
Lululemon’s fast-growing direct-to-consumer segment is a testament to the rapid shift shoppers are making to online apparel purchases. But while companies like Lululemon are cashing in on this trend, Stitch Fix was purpose-built for digital commerce from the get-go.
It’s been a bumpy ride in the short few years since Stitch Fix went public, but it’s also quickly scooping up market share in the apparel industry thanks to its personalized shopping experience. The company is all about clothing and accessories right now, but its vision is far-reaching: “To transform the way people find what they love.”
Stitch Fix does this with the help of artificial intelligence (AI), using information collected from customers, their previous purchases, trending styles, and input from stylists to custom-curate ensembles. It’s a potent combination that is still winning over fans. Though pandemic restrictions are being lifted and people can make more in-person purchases again, Stitch Fix added 234,000 net new customers during the third quarter of fiscal 2021 (the three months ended May 1, 2021) for a grand total of 4.1 million. And with shipping available in only the U.S. and U.K., there’s plenty more potential for overseas growth later on.
The company’s sales increased 44% from a year ago (and were up 31% from the same pre-COVID-19 period in 2019) to $536 million during the last quarter. Adjusted EBITDA was $11.6 million compared to negative $20.7 million last year as the company continues to reach a more profitable scale with more shoppers using its service.
As for its outlook, Stitch Fix expects sales to be up at least 22% year over year in the final quarter of the 2021 fiscal year as it recruits more customers, and as average spending by existing customers rises over time.
Stitch Fix is still early in its journey but it’s helping redefine consumer expectations for online retail in the apparel space and could take its AI-based model in plenty of new directions down the road. With shares at just 3.3 times trailing-12-month sales as of this writing, this high-growth clothing business could be a screaming long-term value at this price if its momentum continues.
Skechers: A global pop-culture and fashion staple
It might seem like an underdog in the athletic shoe space, but Skechers has been on a roll so far this year. Shares are up 35% in 2021 to date and close to all-time highs. The company’s “ugly sneakers” (think 1990s-esque footwear that shouts comfort and pragmatism) have become a global streetwear staple. And its focus on international expansion with its affordable lineup of shoes for running, work, and casual occasions has won millions of followers.
That isn’t to say Skechers is an all-out growth company, though. Still very much centered around brick-and-mortar stores, it was deeply impacted by COVID lockdowns last year. It just returned to breakeven in year-over-year sales during the final few months of 2020.
And though sales notched a new all-time high in the first quarter of 2021 (up 15% year over year to $1.43 billion), the footwear outfit is still clawing its way back to higher profitability. Trailing-12-month free cash flow was just $133 million through the first quarter of 2021 on revenue of $4.78 billion — a free cash flow profit margin of just 2.8%.
But Skechers’ bottom line should rebound quickly this year as it laps the pandemic-fueled disruption from a year ago. Helping things along in the first quarter was another quarter of triple-digit-percentage increases in e-commerce, an area where Skechers lagged behind before 2020 but that skyrocketed with accelerated online shopping in the last year.
The company also has new distribution centers running in key markets like China and Europe that will help power its new direct-to-consumer business.
Given the improving situation, management said to expect full-year 2021 sales to set a new all-time record of at least $5.8 billion, up 11% from the previous record in 2019. Full-year EPS should be $1.80 to $2, still down from the record of $2.25 that was set in 2019 but quickly approaching profitable expansion again.
At this juncture, Skechers looks dirt cheap at 1.5 times trailing-12-month sales and 51 times EPS, given its return to growth and its rallying profitability. With comfortable and affordable footwear not losing any steam as people hit the streets again, Skechers looks like a solid bet in a normalizing global economy.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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