Better to Buy: Nike vs. Lululemon Stock

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Both Nike (NKE -3.34%) and Lululemon Athletica (LULU -3.95%) are widely recognized brands that customers love. In the ridiculously competitive retail industry, these companies continue to find ways to stand out from the pack, and that’s a feature that should be attractive to shareholders considering where to invest their hard-earned capital.

So are Nike or Lululemon the better buy now? Let’s find out which of these clothing inventory reigns supreme.

Nike

With 12-month revenue of $47.1 billion, Nike is a powerful consumer brand that has forged an image associated with a winning mentality. This is due to the company’s incredible marketing prowess, partnering with top professional athletes like LeBron James and Cristiano Ronaldo to drive sales. The company’s long operating history of consumer relevance gives me confidence that it will continue to lead the activewear market in a decade.

What should help propel Nike into its next stage of growth is its effort to sell to consumers directly on its apps or in its stores. The company wants to drive product innovation and speed to market, while building closer ties with its customers. Nike currently has hundreds of millions of members in its digital ecosystem.

Despite what appears to be an otherwise sound business, Nike has faced some issues. In the last quarter, inventory in North America, the company’s largest market, jumped 65% over the prior year period due to early holiday orders and delays in shipments. providers. This will hurt the profitability of the current quarter. To be fair, in its last fiscal quarter, Lululemon’s inventory balance jumped 85% year over year, demonstrating that no company is immune to the macroeconomic climate.

Over the past five years, Nike stock has produced a respectable return of 67%, beating the total return of the S&P500 by 10 percentage points during this period. But the shares are currently down 50% from their all-time high and are now trading at a price/earnings ratio (P/E) of 25, which is about half the price of the average of the last five years. As an industry-leading company that has one of the strongest brands in the world and still has opportunities for growth, this could be a solid investment.

lululemon

Lululemon’s business has flourished over the past two years, which is impressive considering the global supply chain challenges faced by many companies. And the momentum hasn’t stopped, with sales growing 28.8% in the second quarter of fiscal 2022. Looking ahead, management expects revenue to double between fiscal 2021 and 2026 to reach $12.5 billion. Executives want to rely heavily on international growth and expansion of the men’s segment, two areas dominated by Nike.

Lululemon’s branding strategy, which emphasizes local and community-driven marketing initiatives, is not as costly as Nike’s approach. This has resulted in exceptional profitability. In its final quarter (ending July 31), both Lululemon’s Gross margin of 56.5% and a profit margin of 15.5% were better than Nike’s.

But if there’s one complaint investors can have about Lululemon, it has to be the $500 million purchase of interactive home fitness company Mirror in the summer of 2020. That acquisition was completed in height of the pandemic, when consumers were stuck at home. and finding ways to exercise. But the challenges of this industry today, as evidenced Platoonshare price crash, suggests Lululemon has grossly overpaid Mirror.

Lululemon shares generated a stunning five-year return of 388%, crushing both Nike and the broader market by a huge margin. And even with the stock down 37% from its all-time high last November, it’s trading at a P/E of 35. While that seems pricey (at least relative to Nike), the current valuation of Lululemon is well below its 10 annual average of 43, demonstrating that investor enthusiasm may have cooled off a bit.

The winner

All told, I have to choose Lululemon as the best stock to buy today. Do not mistake yourself; Nike is a fabulous company with a long and storied history of success, not to mention the fact that it has been a winning investment for shareholders. But with a 10-year time horizon, I can’t choose Nike over Lululemon as the only stock to own.

The areas in which Lululemon lags behind Nike – primarily its international presence and the men’s segment – represent huge growth opportunities for the company in the future. The Lululemon brand will only get stronger over time, and it’s a more profitable business.

And yes, Lululemon has a higher valuation than Nike, as the P/E ratio shows, but I think that’s justified given the company’s tremendous performance throughout the pandemic, as well as its outlook going forward. long term. That’s why Lululemon is the best buy right now.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Lululemon Athletica, Nike and Peloton Interactive. The Motley Fool has a disclosure policy.

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