As companies, Nike (NKE -0.99%) and Starbucks (SBUX 0.76%) don't compete with each other, but they share some similarities as stock investments. They each command a highly valuable brand and sit at the head of an attractive global growth industry. For Starbucks, that niche covers premium on-the-go caffeinated beverages. Nike serves athletes and anyone else interested in high-performance fashion.
But which company would make the better stock investment today? Below, we'll pit these two dominant consumer-discretionary giants against each other, with an eye toward long-term return potential following the COVID-19 pandemic closures.
Nike was enjoying robust growth before the novel coronavirus began hurting the business in February of 2020. Sales growth accelerated to 13% in the fiscal second quarter from 10% in the prior quarter. The footwear and apparel giant also notched a rising gross profit margin as shoppers responded favorably to a flood of innovative products across brands, like Jordan, Air Max, and Zoom.
That momentum carried through to the beginning of the COVID-19 slump, as Nike took only a small hit from February store closures across China. Its robust e-commerce platform allowed most of that demand to simply move online, as it has for peers like lululemon athletica (NASDAQ: LULU).
Starbucks had been seeing arguably better momentum heading into the crisis. Sales reached their highest growth rate in years by early March, fueled by hit releases like Nitro Cold Brew and a refreshed line of breakfast wraps. "Our focus on the customer experience, beverage innovation, and digital customer relationship is a powerful combination," CEO Kevin Johnson said in late April.
Trends turned sharply negative from there, though, as shelter-in-place orders reduced store hours and traffic across key markets like the U.S., Europe, and China. The chain continued to fill to-go and drive-through orders, but COVID-19 had a major impact on the fast-food industry that won't disappear quickly.
Price and value
Investors have incorporated that weaker operating picture into the stock price, with Starbucks shares underperforming the market in 2020 through late May, while Nike has beaten the S&P 500 so far. Neither stock could be considered cheap, but Starbucks is cheaper (relative to Nike) than it has been in over a year. You can buy the stock for about 3.5 times sales, while Nike is valued at closer to 3.8 times sales today.
The P/E ratio tells the same story, with investors currently paying about 36 times the past year's earnings for Nike stock and just 28 times for the coffee giant.
Risk and return
That valuation gap makes sense if you believe Starbucks won't return to its pre-COVID-19 winning streak any time soon even if Nike can easily rebound once its stores fully reopen. The coffee titan's next earnings report in late July will answer part of that critical question, but investors might see the best returns by purchasing the stock before that clarity arrives.
Its likely that the restaurant and fast food industries will be pressured for at least the next year, and many businesses won't survive that shake out. But Starbucks has the assets it needs to emerge from that situation even stronger. That fact doesn't mean Nike isn't an attractive consumer-discretionary stock right now, just that the long-term return outlook is tilted in Starbucks' favor today.