Forget About lululemon athletica, Buy Nike or Under Armour Instead

Lululemon keeps disappointing, and the company does not seem to be leaving its problems behind. Investors looking for alternatives in the sector may want to consider Nike and Under Armour instead.

Jun 13, 2014 at 9:34AM

Lulu

Source: lululemon athletica.

lululemon athletica (NASDAQ:LULU) crashed 15.9% on Thursday after delivering disappointing financial performance for the first quarter of 2014. Investors tend to overreact to negative news in the short term; however, Lululemon is full of uncertainties at this stage. For investors looking to make a purchase in the sector, Nike (NYSE:NKE) and Under Armour (NYSE:UA) could be much sounder choices.

Lost in transition
Lululemon is going through a transition year, as the company is trying to leave its mistakes in the past and accelerate growth. Quality problems generating excessive sheerness in some of the company's pants, followed by remarkably inadequate public comments from the company's founder and former chairman, Chip Wilson, insinuating that women's bodies may be to blame for the problems with the company's products, have materially affected Lululemon's brand image and reputation.

Generating more uncertainty about the company's direction, Wilson, who owns 27% of the company's shares, issued a press release on Wednesday saying that he voted against the re-election of Chairman Michael Casey and Director RoAnn Costin to the company's board. Wilson also criticized the board for being "heavily weighted toward short-term results at the expense of product, culture and brand and longer-term corporate goals" in the press release.

All this noise surrounding Lululemon is generating lack of visibility for investors, and the recent earnings announcement will hardly dissipate the uncertainty. The numbers for the last quarter were not really that bad, but forward guidance was a big disappointment.

Sales during the quarter ended on May 4 came in at $384.6 million, an 11% increase versus $345.8 million in the first quarter of fiscal 2013, while comparable-store sales increased by an uninspiring 1% during the quarter. Earnings per share came in at $0.34, marginally better than the $0.32 per share forecast on average by Wall Street analysts.

On the other hand, Lululemon cut its forward-looking guidance for the fourth consecutive quarter, indicating that the company can't manage to turn the business around in a sustainable way. Management expects revenues for the second quarter to be between $375 million and $380 million, versus $387.2 million forecast on average by Wall Street analysts.

Comparable sales are expected to be down in the low- to mid-single digits during the quarter, and earnings per share are forecast to be between $0.28 and $0.30 per share, considerably lower than the $0.36 per share forecast by Wall Street analysts on average.

Nike for quality and Under Armour for growth
Lululemon is presenting too many uncertainties at this stage; management turmoil can generate difficulties on multiple fronts, and the company has not proven its ability to accelerate growth. Investors looking to invest in the sector may want to take a look at Nike and Under Armour instead.

Nike is the undisputed heavyweight champion in the industry, and the company benefits from one of the most popular and recognized brands in the world. Nike is a steady performer with a huge global presence and a gigantic marketing budget that differentiates the company from the competition.

Besides, Nike is delivering better financial performance than Lululemon. For the quarter ended on Feb. 26, Nike delivered a 13% increase in revenues, to $7 billion, while sales excluding currency fluctuations jumped 14% versus the prior year. Worldwide future orders were up by 12% in U.S. dollars and 14% when adjusted for currency volatility.

Under Armour is less than 10% of Nike's size in terms of revenues, but the company is generating truly explosive growth rates on the back of quality differentiation and a culture of permanent innovation.

Under Armour announced an impressive 36% increase in revenues during the quarter ended on March 31, reaching $642 million during the period. Earnings per share increased by an even stronger 71% year over year, and the company raised its guidance for both sales and operating income in 2014.

Investors looking for a solid quality leader in the sports-apparel business will hardly find a better alternative to Nike, while those who prefer a smaller company with extraordinary financial performance and abundant room for growth may want to take a look at Under Armour instead.

Foolish takeaway
Lululemon's financial performance has been disappointing for quite some time, and last quarter was no exception. Lululemon can't seem to find a clear path to overcome its problems, and it's hard to tell, at this stage, if the worst is over for the company, or if investors will need to face further difficulties down the road. Nike and Under Armour look like superior choices in the industry.

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Andres Cardenal has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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