Several digital native fashion retailers are worth taking a look at, according to DA Davidson.
“As a digitally native brand, Revolve sits squarely at the intersection of sophisticated data-driven assortment planning and coveted fashion apparel,” the analyst said.
Inventory Overhang Remains A Concern
In the near term, Revolve is struggling with growing pains that are likely to last for several quarters as it "right-sizes" inventory and invests in future growth, Morris said.
Part of Revolve’s inventory overhang has been planned, as the company is building up for the launch of its superdown division and braces for international expansion, he said.
“Yet inventories have risen significantly faster than sales, most recently rising 31% in 3Q, ahead of 21% sales growth,” the analyst said.
A portion of the higher inventory levels have led to more discounting that weighs against gross margin upside, Morris said.
"We see these headwinds continuing for several more quarters."
The Real Deal
DA Davidson initiated coverage of The RealReal, Inc. (NASDAQ: REAL) with a Buy rating and $22 price target.
The RealReal is a brand destination with several first-mover competitive advantages in a market that is displaying accelerating growth, Morris said.
RealReal has a unique business model that makes it possible for the company to be a front-runner for trends like sustainability, uniqueness and individuality that are favored by the millennial and Gen Z demographics, he said.
"With a seamless supply chain, high customer retention, and substantial take rate, we expect REAL to dominate the digital consignment space,” the analyst said.
The RealReal’s authentication process has come into question of late, but this went unmentioned in the DA Davidson note.
Stitch Fix: Rising Ad Spend Tempers Sentiment
Stitch Fix Inc (NASDAQ: SFIX) reported a first-quarter earnings and sales beat Monday, and several analysts highlighted the company’s new "direct buy" feature as a catalyst for future growth.
DA Davidson took a more guarded stance on Stitch Fix, initiating coverage with a Neutral rating and $27 price target.
Morris said he is cautious about Stitch Fix’s growth prospects, cost efficiency and a lack of visibility.
"We rate it Neutral because the company is showing a decelerating client growth rate despite significantly increasing marketing spend at a time when its core business is more challenged by competition and the complexities of growth which is likely to erode margins in the near term."
Stitch Fix is chasing new clients, and its advertising spend as a percentage of sales increased from 3% in 2016 to 8% in 2018 — yet its client growth rate is decelerating, the analyst said.
The e-commerce site is expecting advertising spend as a percentage of sales to settle at around 9%-11% in FY2020, according to DA Davidson.
Increased competition could threaten the company’s market share, Morris said.
“According to our industry sources, Amazon.com, Inc. (NASDAQ: AMZN) and Nordstrom, Inc. (NYSE: JWN) lust for the customer data gathered from a subscription service: sizes, style preferences, direct feedback, etc.”
Revolve Group shares were down 0.15% at $16.98 at the time of publication Wednesday, while Stitch Fix shares were rising 6.08% at $27.82 and RealReal shares were up 1.94% at $17.30.