Stay Away from These 2 Overvalued Apparel Retail Stocks

Even though the apparel retail industry is expected to thrive in the coming months owing in-part to a recovery in brick-and-mortar store sales, with consumers returning to in-store shopping, not all stocks in this space are well positioned to gain. Shares of Stitch Fix (SFIX) and Revolve Group (RVLV) look significantly overvalued at their current price levels given their weak growth prospects. So, we think these stocks are best avoided now. Please read on for details.

The halt in brick-and-mortar store sales last year caused by the COVID-19 pandemic, coupled with stiff competition from established e-commerce vendors, negatively affected the apparel retail sector significantly last year. But with the accelerating economic recovery, a gradual resumption of store operations, and increased consumer spending, the apparel retail industry is witnessing a solid recovery this year.

Investors’ interest in the broader retail sector is evidenced by  the SPDR S&P Retail ETF’s (XRT) 41.9% returns over the past six months versus the SPDR S&P 500 Trust ETF’s (SPY) 15.9% gains. With more than 3.26 billion COVID-19 vaccine doses administered across 180 countries so far, consumers should be increasingly inclined to shop at physical stores..

However, bullish sentiment has sent the prices of some apparel stocks soaring above what can be justified based on their fundamentals and financials. Since their weak financials and gloomy growth prospects do not justify their premium valuations, we think Stitch Fix, Inc. (SFIX) and Revolve Group, Inc. (RVLV) could suffer  a pullback in the near term.

Click here to checkout our Retail Industry Report for 2021

Stitch Fix, Inc. (SFIX)

SFIX operates as a personalized styling service company through its website and mobile application. The company uses data science extensively to predict purchasing behavior, demand forecasting, inventory optimization, and new clothing creation.

SFIX’s reported a $24.22 million operating loss in its  fiscal third quarter ended May 1, 2021. The company also reported a $18.85 million net loss, while its loss per share for the period came in at $0.18.

Analysts expect SFIX's EPS to decline 9.5% year-over-year to $0.46 in its fiscal year 2022. The stock has declined 2.1% over the past month.

In terms of forward price/sales, SFIX is currently trading at 3.26x, which is 147.7% higher than the 1.32x industry average. Also, in terms of its forward EV/sales, the stock is currently trading at 3.21x, 105.8% higher than the 1.56x industry average.

SFIX’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.

The stock is also rated a D grade in Value, and a C in Growth and Stability. Within the D-rated Internet-Services industry, it is ranked #29 of 43 stocks.

To see the additional POWR Ratings for Sentiment, Quality, and Momentum for SFIX, click here.

Revolve Group, Inc. (RVLV)

RVLV is an online fashion retailer that runs a platform to bring together customers, global fashion influencers, and developing, established, and owned businesses. The  company offers women's clothing, footwear, accessories, and beauty products under recognized and developing brands, as well as owned brands. Revolve and forward are the two-business segments through which the company operates.

Although RVLV’s total net sales increased 22.5% year-over-year to $178.9 million, its total operating expenses increased 12.5% from the year-ago value to $75.45 million in the first quarter ended March 31, 2021. The company’s average order value declined 1% year-over-year to $256,000 during this quarter. Moreover, the company’s net cash provided by financing activities came in at $4.32 million, compared to $30.98 million in the prior-year period.

Analysts expect RVLV’s EPS to decline 37% year-over-year to $0.17 in the next quarter ending September 2021.

Currently, RVLV looks extremely overvalued. In terms of forward non-GAAP P/E, RVLV’s 82.81x is 399.2% higher than the 16.59x industry average. Its 60.07x forward EV/EBITDA is also significantly higher than the 11.55x industry average.

RVLV’s poor prospects are also apparent in its POWR Ratings. The stock has a D grade for Value and Stability. Click here to see the additional POWR Ratings for RVLV (Quality, Growth, Momentum, and Sentiment).

RVLV is ranked #18 of 73 stocks in the D-rated Consumer Goods industry.

Click here to checkout our Retail Industry Report for 2021


SFIX shares were trading at $59.39 per share on Wednesday afternoon, down $3.93 (-6.21%). Year-to-date, SFIX has gained 1.14%, versus a 16.96% rise in the benchmark S&P 500 index during the same period.



About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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