Best Buy: Nike vs. Stitch Fix
The COVID-19 crisis has crushed many retail stocks this year, but Nike (NYSE: NKE) and Point correction (NASDAQ: SFIX) both weathered the storm after briefly passing out in March. Both stocks are up more than 10% for the year, compared to the S&P 500’s roughly 5% gain.
Nike and Stitch Fix are very different types of retailers: one is the world’s largest producer of athletic shoes, while the other is a pioneer in selling personalized clothing online. Should investors stick to classic Nike strengths or should they pay more attention to Stitch Fix’s disruptive business model?
How do Nike and Stitch Fix make money?
Nike generated 95% of its revenue from its eponymous brand last year. The rest came mostly from Converse, which he bought in 2003. Two-thirds of Nike’s sales came from footwear products last year. Clothing sales still accounted for 31% of its sales, with the rest coming from equipment sales and brand licensing rights.
Nike’s primary market is North America, which accounted for 41% of the brand’s revenue last year. Nike still relies heavily on third-party retailers, but has gradually expanded its direct-to-consumer business with online sales and new physical stores.
Stitch Fix is an online clothing retailer that selects its products from over 250 “established and rising” brands. He charges customers a one-time style fee after answering a series of questions, then sends them boxes of five selected items.
Customers pay for the items they want, then return the rest with free shipping. If they keep an item, the styling charge is deducted from the price; if they keep all five, they get a 25% discount. The company operates primarily in the United States, but it also launched its service in the United Kingdom last year.
Which business is growing the fastest?
Nike’s revenue declined 4% (2% in constant currencies) in fiscal 2020, which ended on May 31, as the COVID-19 crisis disrupted its supply chains and its retail channels in the second half of the year.
Its digital sales grew throughout the crisis, but couldn’t make up for its declines in physical stores. The increase in digital sales also weighed on its margins with higher fulfillment costs resulting in a 36% drop in its full-year EPS.
Nike did not provide any guidance for 2021. But on last quarter’s conference call, CFO Matthew Friend said Nike started reopening stores in May and expects gradual stabilization around the world as it continues. that “the retail trade reopens and that each market normalizes supply and demand”. It also plans to continue to grow its digital presence by developing its mobile app and e-commerce website.
However, Friend still expects Nike’s revenue to decline year-over-year in the first half of 2021. Analysts expect Nike’s revenue and profit to increase by 5% and 46%, respectively. % for the entire year, which suggests that its growth will normalize in Part Two. The stock’s steady growth this year and its forward PER ratio of over 50 suggests investors aren’t too worried about Nike’s near-term headwinds.
Stitch Fix’s revenue grew 29% in fiscal 2019, which ended last August, and its EPS increased 6%. Its revenue grew 11% year-over-year in the first nine months of 2020, with a significant slowdown in the third quarter as the pandemic disrupted its warehouses, and it recorded a net loss.
On the plus side, Stitch Fix’s revenue was down only 9% year-on-year in the third quarter, compared to an 80% drop for the wider apparel market, and its revenue would have increased if the pandemic did not fall. had not disrupted its distribution services. Its active customers also grew 9% year-over-year in the third quarter, while its net revenue per active customer increased 6%.
Stitch Fix also didn’t provide advice for the entire year. But on his last conference call, COO Mike Smith noted that his momentum is improving and will likely generate positive revenue growth in the fourth quarter. Smith also predicted that its gross margin would increase sequentially as it resolves some of the initial disruptions from COVID-19.
Analysts expect Stitch Fix’s revenue to grow 7% this year and 16% next year, but earnings to remain in the red for both years. This makes Stitch Fix harder to assess than Nike, but the stock looks pretty cheap at just 1.5 times next year’s sales estimate.
The winner: Stitch Fix
Nike and Stitch Fix are both retail survivors, but Nike’s low expectations for the first half of the year and unusually high P / E ratio keeps me from buying the stock. Its low 0.9% forward yield will also not offer much of a safety net if the market collapses.
Stitch Fix is a more speculative investment than Nike, but it has a leading edge and appears to be pulling shoppers away from mainstream clothing retailers. The stock also looks cheap relative to its revenue growth, and its net loss is expected to narrow next year. It’s not a perfect investment, but it’s arguably a better bet than Nike and many other retail games in this wobbly market.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.