Barron's Streetwise - Back-to-Work Fashion Angst

Episode Date: July 16, 2021

Jack talks with the incoming CEO of Stitch Fix. Also, why your favorite fashion brands might not make great stocks. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. Each pair of jeans we send, eight or nine times out of ten, it fits, which means like our return rates are half of typical apparel, which is not just good for us, but it's so much better for the consumer

because that's one of the biggest pain points. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Elizabeth Spalding. She's the president and soon-to-be CEO of Stitch Fix, an online clothing seller that selects garments for you. The company went public close to four years ago this November, and it recently had a stock market value of close to $6 billion, making it about as large as Foot Locker or American Eagle. I've got some questions about back-to-work fashion, and coming up, Elizabeth will give some answers, along with the CEO of M.M. LeFleur, a women's workwear boutique. And we'll hear from a Wall Street analyst about which clothing stocks look attractive now.

I'm a suit holdout, or at least I was before the pandemic. I own Brooks Brothers suits, Allen Edmonds shoes, and a dozen identical dress shirts, all solid colors. The only decision I had to make each morning was blue or charcoal. The resulting combinations ranged from nondescript to immediately forgettable. Over the decades, office fashion has transitioned from suits to business casual and then to a look I'll call corporate Pilates. It seems comfy, but I was planning to ride out my set-in-his-ways look until retirement before shifting full-time to my weekend power combo of L.L. Bean golf shirts and New Balance sneakers. But there are two problems.

First, my suits have gotten, let's just say, snug over the past year. The big-screen exercise bike and rower that I bought haven't helped, even though I've used each of them at least twice. The second problem is that it's unclear whether much of the world working from home for more than a year has abruptly shifted office fashion. There seems to be an unspoken consensus around Labor Day as the moment when workers will return to their offices in big numbers. What if I'm the only one wearing a suit, and everyone else has gone from corporate Pilates to workplace pajama party? At least in the past, there were a few other suit holdouts.

Sometimes we'd even nod to each other, like two Buick lacrosse drivers who pulled up at the same stoplight. Now I'm worried that my forgettable look will suddenly be noticeable, and that's not what I'm going for. I saw that Brooks Brothers was pushed into a bankruptcy and restructuring during the pandemic, along with Tailored Brands, which owns Men's Warehouse and Joseph A. Bank. Not great news for suits. Then again, my fashion instincts aren't what you call razor sharp. Then again, my fashion instincts aren't what you call razor sharp. Maybe there's pent-up demand out there for dressing up, for wearing something spiffier than sweatpants and slippers below the zoom line. If even I'm thinking about a fashion overhaul,

maybe the clothing market is headed for a pre-Labor Day bonanza. JP Morgan expects apparel sales to jump 21% this year. That would mark 6% growth from 2019, before the pandemic. To learn more about what fashion pros are thinking, I spoke with Sarah LaFleur. She's the CEO of the direct-to-consumer clothing seller, M.M. LaFleur. You know, Jackson was saying, I should put on a better shirt because I'm about to speak with a fashion expert, but... Oh my gosh.

No, no, you don't understand. It's my partner who is a designer. I'm just the one who's counting money. Oh, good. So, don't worry. And your shirt looks great. Sarah, along with fashion designer Miyako Nakamura, founded M.M. LaFleur in 2013. The goal was to address frustrations women in professional roles face when it comes to dressing for work.

I used to work in a very corporate environment and it was really stressful getting dressed for work every morning. I know it's not easy for the men either, but there is a stat that say women on average spend two more weeks per year than men getting ready for work every day. If you can just imagine, you know, what is it that you would do with those two weeks? I would definitely like sleep more or go on vacation. But I think that anxiety around dressing is real. But I think the anxiety around dressing is real. From what Sarah says, women might be taking a page from my weekend khakis and shorts playbook. My waistlines all have hidden elastic that can accommodate what I like to think of as a little transitory inflation. Here's Sarah.

Some of that is saying, OK, I'm not going to wear tight pants anymore. I'm going to wear pants with elastic waistbands. That's a big change for women. Wait a second. Women are saying that? I'm a believer. I'm sold on that one. You're sold on the elastic waistpants? I mean, it's true.

You're kind of like, why would I ever go back? I've got the golf pants with the hidden elastic where it accommodates, you know, if you're going up or down, it changes with you. That's probably not what you mean. No, no. Actually, Jack, that's exactly what I mean. Because a quarter of workers are saying that they have gone through some sort of weight gain or weight loss through COVID.

I'm certainly one of them. I also, I had a baby. A lot of different things have happened in the past 18 months, right? And- Congratulations. Thank you. But I, you know, I had a baby and I also like basically ate croissants every day while sitting on my sofa. So I'm two sizes bigger than I was pre COVID. And a lot of what I'm

leaning into, okay, I've had to like buy a new wardrobe because initially I tried squeezing myself into my old size. And I think there is nothing kind of more depressing than having to unzip your pants during a meeting because you're so uncomfortable. In addition to elastic waistbands, one trend gaining steam is what Sarah calls power casual. She says the appeal is communicating professionalism while keeping up with the times, which she says is a particular challenge for women in tech. The impetus for designing into Power Casual actually came from our customers. We had a lot of women, they work at Facebook or Google or what have you,

and their male counterparts, they might be wearing hoodies and jeans to work, but that's not what the women are wearing. And yet if you wore a dress to work, other people think that we're interviewing. So is there a clothing line that you can design really for this kind of women in mind? Before the pandemic, Power Casual made up 25% of M.M. LeFleur's sales. Now the number is close to 60%. If that's what women are doing, I can't imagine it bodes well for my suits, but at least I seem to have something in common with one of Sarah's influencers. I think in a way that business casual or business formal, like there was a certain

eternalness to it. Like my dad, I swear, is still wearing suits that he got made in the 90s. I do think power casual is a little bit more about keeping up with what's got made in the 90s. I do think Power Casual is a little bit more about keeping up with what's going on in the fashion world. I don't necessarily think it means that you're having to be trendy, but it does mean, you know, pay attention to what you're seeing around you. Your dad and I might need to put on a fashion show together.

The pandemic, of course, has changed not just what we wear, but how we shop. In the first quarter of 2021, U.S. e-commerce sales were up 39%. That's welcome news for Stitch Fix, ticker S-F-I-X. It sells clothing online, but incoming CEO Elizabeth Spaulding doesn't call it an online retailer. It's a personal styling service. Rather than you scrolling through tons of ideas online or in a store, we pick for you with that power of data science and our human styling and send five items. And people on average are keeping half of them, which is a radically different idea. and send five items and people on average are keeping half of them, which is a radically different idea. And so we saw just tremendous signup in our service, but also adoption of our newest feature, which is kind of our migration to sort of our DVD era with five items in a box to now a streaming shopping feed that people could add on to what they'd bought previously. And so,

you know, it's really ushered in the new era for Stitch Fix. And so, you know, it's really ushered in the new era for Stitch Fix. As countries went into lockdown in March of last year, Stitch Fix was better positioned than many of its rivals. It doesn't have an expansive physical store chain and big rent payments. It wasn't carrying a ton of debt, and its business model allows it to respond quickly to changes in consumer behavior. Here's Elizabeth. One of the things that we saw immediately in our data as we headed into lockdown was just, you know, a 10x increase in requests for comfortable clothes and work from home. We cut our workwear receipts by 10% and we shifted into this huge migration into athleisure and active.

That's not to say Stitch Fix was unaffected by the sudden economic shutdown in june of last year the company laid off nearly 20 of its staff but now as workers are heading back to offices elizabeth says the company is well positioned to cash in on wardrobe updates she mentions stitch fixes low merchandise return rates, which hold down costs. You know, I think a lot of the ways people have approached e-commerce has been, let me order that in two or three sizes and hope one fits and I'll send back the rest. And that's really not the way that we operate. We're really focused on getting your fit right.

As a male consumer, we have 10 points of data that really inform our understanding of your fit. We have 4.1 million active clients. We can understand the power of other customers in our ecosystem that are similar height and shape. And so when we send items, we're really planning on it fitting rather than you sending it back. I told Elizabeth about my weekend clothing strategy.

I wait for discounts on colors that other L.L. Bean shoppers apparently couldn't be persuaded to buy. Pistachio and safety orange are two of my go-tos. I asked Elizabeth what she would need to know to make someone like me more fashionable. Yeah, I mean, so basically the way our service works is you go through what I think is a pretty fun and engaging style profile at the beginning. And some of those things are more just your fashion preference, sort of thumbs up and thumbs down of things that you're seeing. And we get smarter as you take that quiz. And then we ask you kind of handful

of questions, the typical sizes you wear, the brands you wear, but then we do ask a few things that actually are quite informative. Like are the shirt sleeves usually a little too long or too short for you? Kind of getting a sense of torso length, arm length, things like that, that are pretty big indicators of how clothes typically fit you as well as what you prefer. Like, you know, we have a stretch knit blazer by Artifact, which is one of our own brands. I think that would look great on you, Jack. I actually thought of a few things that I think would really fit well. The Artifact stretch knit blazer.

Thank you for the tip, Elizabeth. I can't remember the difference between a blazer and a sport coat, but I do find the words artifact and stretch comforting. At the risk of overstepping my bounds, I offered Elizabeth a fashion tip of my own. Years ago, when my daughter was small, my wife used to buy matching dresses for the two of them, and I think that trend might be returning in a new form. So I noticed a while ago that my dog was wearing a raincoat that matches my wife's raincoat. I think she's doing it with the dog now. And I'm just going to put that out there. That might be a business opportunity for you. I know you have men, women, and kids, just, you know, pets, pet clothes. I think you would make many of our employees very happy

with that idea. I'll leave it for listeners to form their own judgments on Stitch Fix stock. It has been exceptionally volatile. Early in the pandemic, it fell below its $15 IPO price, but by January of this year, it had shot up to more than $90. It has since come back down to the 50s. Elizabeth sees plenty of growth ahead. This moment is the moment we've been waiting for, both because we're at the point where we've got this huge 10-year lead in data and personalization within a very complex choice category, and now we're embarking on personalized shopping, which we believe will address every consumer use case, but the consumer is also ready. And you kind of wait for these seismic shifts where behavior is really ready to change. You can't always create that as a company, right?

Like Peloton is having this huge surge. Well, part of that is because we all had to figure out how to work from home and work out from home. I mean, this is very similar for us in terms of it's changing structurally consumers' behaviors from a quarter of their shopping online to 40% of apparel shopping online. And our model is really superior in the sense of, to your point, what people love about stores is the advice, the guidance, the help that, is that going to fit me? Somebody telling me, you look good in that and giving you a little bit of encouragement. And that's really the power of our model. Back to work fashion trends aren't the only consideration for clothing stock investors. To learn more about which shares to favor now,

I reached out to Wells Fargo securities analyst Ike Boroshov. Under your coverage, which are the companies that are best positioned for the kinds of things that you think people are going to need or want as we go through the summer and head into fall? Well, look, I think the fashion brands are well positioned because those are the categories that are going to bounce back the hardest. So a name like Ralph Lauren, for example, was hit one of the hardest of the apparel brands during the recession. Why? Because Ralph sells a lot more polo shirts and dressy attire than, say, a Calvin Klein does, who's much more casual, or a Champion, or a Nike, which is clearly more athletic. So they're going to see a better rebound off of the lows they've hit. But if you're asking what brand is just kind of doing it right, and we're not necessarily just

talking about the next 12 months, we're talking about the next five years. I mean, I think Lululemon has done a fantastic job. You know, for a company that started off as a women's yoga pant brand and is now, you know, four or five billion dollars, a quarter of it is men's. Full disclosure, I wear a lot of Lululemon. I was wearing a lot of Lululemon to work pre-pandemic. ABC pants, commission pants, you throw that on with a casual button-down shirt, and that's kind of the new look of what used to be suit and tie. Are Ralph Lauren and Lululemon, would you describe those as your two top picks? Are there others you would describe like that? No, no, we don't have a buy on Lulu, actually. We downgraded it a year ago. You know, Lulu

was one of the biggest beneficiaries in apparel from COVID. All the things I'm saying about being casual played into their hands. I mean, my group was very binary last year. It was, are you a COVID winner? Are you a COVID loser? Are you a brand that is going to do well in a stay-at-home environment? Are you a brand that's going to do poorly in a stay-at-home environment? That said, just because a brand is doing well or is well-positioned does not necessarily make it a good stock. Okay, so Lulu is a company that impresses Ike, but it's not one of his current stock picks. So what other stocks does he like? A couple of the names that we like on the other end of the spectrum where we think that they've

structurally improved, they're in good categories, and they're set to win are the two handbag companies. That would be Tapestry, TPR, and Capri, CPRI. Both of those stocks have been tremendous, and we think that both of those names still has lots of upside. There are signs that handbags are coming back in a way that we haven't seen in many, many years. Another key thing for handbags is, unlike apparel, the shift to online, which is a very big topic right now for MySpace, is a really good thing for them. The average order values are pretty high, so you can absorb the shipping costs. The return rates are pretty low because there's not a lot of sizing with handbags. You don't need to buy a shirt and realize it's too big or small and send it back.

using handbags. You don't need to buy a shirt and realize it's too big or small and send it back. Ike says the accelerated shift toward online shopping could make things more difficult for so-called omni-channel retailers, which do business both in stores and online, because in-store purchases contribute more to their profit margins. in-store purchases contribute more to their profit margins. Look, apparel is typically lower margin online. I don't care what they tell you. They would much prefer you to spend that incremental dollar in their store than online because that store is a much more fixed cost business where they can leverage that dollar sale and make more money off of it versus online, where there's a lot more variable cost component to it.

sale and make more money off of it versus online, where there's a lot more variable cost component to it. Store closings are nothing new. Retailers were closing stores for years before the pandemic, and it's not just about e-commerce. As I explained in a Barron's Cover story two years ago, the U.S. might simply have too many stores. It had more than three times the retail square footage per person as other developed countries. Ike says to expect plenty more closings from here. The last company that kind of had to come to Jesus on their store base was Victoria's Secret, which last year finally announced that they were closing about 30% of their U.S. stores. And that's just because Victoria's Secret had been mismanaged for a number of years. But at this point, yeah, I think everyone is reassessing their store base. The mall isn't dead. The malls aren't going to zero, but there's going to be a lot fewer of them in the future than there are today.

One last stock Ike likes is Gap. The ticker there is G-P-S. Why not G-A-P? Because that ticker used to be taken by a grocery chain called A&P. And A&P's full name used to be the Great Atlantic and Pacific Tea Company. That's the kind of fun fact you can share at a cocktail party and watch people slowly excuse themselves and walk away. Here's Ike on a high-risk gap partnership. A Yeezy collaboration with Kanye West, it's the riskiest, but also the most compelling thing I've seen Gap do in the entire time I've covered the company, partnering with Kanye. And you see what a partnership or a collaboration like that can do to a business. Look no further than Adidas, who created the Yeezy

line several years ago, back when the brand was really struggling. And look at the halo it created over that business, which has really done wonders for that company and that stock over that time. I think there's a real opportunity here for Gap to, dare I say, get a little bit of its coolness back that hasn't existed since the 1990s. that has an existence in the 1990s. Thank you for listening. Jackson Cantrell is our producer.

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