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Their Stores Are Closed, but These 2 Apparel Stocks Are Still Buys

By Demitri Kalogeropoulos - Apr 23, 2020 at 9:00AM

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Two great names in an attractive industry niche.

Apparel stores have been closed for weeks, and it might be several more months before the industry returns to the sales mark it had reached before the pandemic. Those facts make it a risky time to consider buying clothing stocks, which will be reporting slumping revenue for at least the fiscal second quarter -- and perhaps beyond.

The sports apparel niche has a brighter outlook, in part because the leading companies have already built up robust e-commerce networks. Their inventories are less seasonal, too, meaning there's reduced risk of costly writedowns ahead.

With that in mind, let's look at why Nike (NKE -0.88%) and lululemon athletica (LULU 1.10%) look like good buys today even as most of their stores sit empty.

A jogger runs over a bridge.

Image source: Getty Images.

Nike has been there

The COVID-19 pandemic is unprecedented, but Nike has already shown investors how it might emerge from the crisis in a stronger position. Its last quarterly report included a period of aggressive stay-at-home orders in China, including more strict lockdowns than have occurred anywhere in North America. China has been a critical growth market for Nike, responsible for adding $1 billion in incremental revenue to its fiscal 2019 results.

However, rather than slumping, as investors had feared, sales dipped just 4% in China last quarter. A 30% spike in e-commerce volume cushioned the blow from diving customer traffic, management said in late March. Nike has also noted steady progress toward more normal retailing volumes as stores have reopened there.

Every market is different, so investors can't expect the U.S. to follow that exact path. But Nike came into the pandemic with positive momentum that held through the temporary retailing disruption in China. Its e-commerce segment should help it maintain relevance in other geographies, too.

Lululemon has options

Lululemon has hit all the right notes for investors for more than a year. It has blown past its sales targets in each of the last four reports, for example. The yoga apparel specialist even notched a fifth consecutive year of rising profitability in 2019 despite extra tariff and shipping costs. Its digital sales are another standout, responsible for 29% of the business this past year.

A woman holds a yoga pose in front of a bright window.

Image source: Getty Images.

That factor should help Lululemon endure the temporary store closures in its core U.S. and European markets. But the bigger reason to like this stock over the long term is the success management has had in pushing into new niches. Whether its men's apparel, personal care, or outerwear, the Lululemon brand has translated well outside of the main women's yoga focus.

The chain also has a huge opportunity to expand into new geographic markets. Its international business expanded at a 32% rate last year compared to 20% in the U.S. market.

Embrace the differences

There are some major differences between these two stocks, including the fact that Nike's sales base is larger and more diverse. The sports apparel giant boasts a massive footwear business, after all, and it's one of the world's most valuable brands.

On the other hand, Lululemon is more profitable and has been growing at a faster rate in recent years. Those successes should continue if the company can keep raising its innovation game.

The good news is that investors who like some aspects of Nike's business and other parts of Lululemon's don't have to compromise. Consider buying both of these high-quality consumer stocks with an eye toward holding them well past the time when the COVID-19 threat has ended.

Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$116.01 (-0.88%) $-1.03
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$333.42 (1.10%) $3.62

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