Better Buy: Nike vs. Lululemon
Investors have different expectations for Nike (NKE 3.24%) and Lululemon Athletica (LULU 1.02%) heading into 2023. While their industries could see a slowdown as consumer spending weakens, both companies are well-positioned to generate higher sales and earnings over the long term.
With that optimistic picture in mind, let’s stack these retailers against each other to see which comes out on top as the better investment right now.
Lululemon has the stronger track record
Nike’s late-December earnings report put the footwear giant back in growth mode, but Lululemon has the better momentum on this score. Sales are up a blistering 22% through the nine months that ended in late October, thanks to solid demand for its premium athleisure products.
Nike posted similarly strong growth for its fiscal first quarter that ran through late November, but its previous 12-month growth was just 6%. Zoom out a bit more, and it’s clear that Lululemon is on the better footing when it comes to sales gains.
Part of that success can be tied to the company’s relatively small footprint, which gives it more room to expand into new geographies, product categories, and demographics. Nike is more mature, so its growth prospects aren’t as large.
Nike has weaker profitability
Lululemon also looks better when judged by profitability. Gross profit margin is only edging lower in 2022 despite soaring costs. And operating income has risen to 19% of sales this year from 18% in 2021. Contrast that performance with Nike, which is expecting a second consecutive year of weaker profitability due to promotions aimed at clearing out older inventory.
The good news for Nike shareholders is that the company appears to be past the worst of this inventory rebalancing program, meaning profitability should improve from here. Yet Lululemon still trounces its larger rival when it comes to both gross and net profitability.
The cheaper buy
Nike shares have a much lower valuation, even after the stock’s jump following its encouraging fiscal Q1 report. An investor would have to pay just 3.8 times annual sales for Nike stock, compared to 5.5 times for Lululemon.
That valuation gap makes Nike the more attractive option if you’re seeking exposure to steady sales growth without taking on too much risk. The company’s much larger global sales footprint, for example, should cushion it against significant declines in the event of a recession in key markets like the U.S. and Europe.
On the other hand, Lululemon has the brighter growth profile and is already delivering market-thumping profitability and earnings growth. It makes sense for growth-focused investors to gravitate toward this stock, especially since its valuation is near the lowest point shareholders have seen over the last five years.
Lululemon might be hit harder by a sharp slowdown in the athleisure industry. Its more focused portfolio exposes it to big potential write-downs if demand quickly tilts away from premium athleisure products in the U.S. geography.
But this highly profitable business has demonstrated that it can expand earnings quickly through boom times and through a period of high inflation. That success suggests this stock will be a long-term winner, even if shares hit more turbulence in 2023 due to rocky economic growth trends.