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Better Buy: Lululemon vs. Walmart

By Adria Cimino – Jun 25, 2020 at 7:00AM

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Both companies served customers well during the coronavirus outbreak, building a solid foundation for what comes next.

Walmart (WMT 2.18%) and lululemon athletica (LULU 4.49%) have a major point in common: In different ways, they both managed to successfully navigate the economic headwinds brought on by the coronavirus outbreak. Walmart, a grocery and general merchandise giant, helped customers stockpile when they most needed essentials. Lululemon, the maker of athletic apparel, put more focus on e-commerce and keeping clients digitally connected.

While the crisis isn't over, the current stage of reopening businesses means life is slowly returning to normal for retailers. I'm optimistic about the stock performance of both Lululemon and Walmart, but if I had to choose just one right now, it would be...

Well, let's have a closer look at both before revealing the answer.

A group of young women laugh together as they wait for yoga class to start.

Image source: Getty Images.

The case for Lululemon

Lululemon was already going strong prior to the current health crisis. The company's market value has nearly quadrupled in just the past two years, and the share price has climbed about 290% in that time period. And for good reason. Revenue has grown steadily for more than a decade, and Lululemon has made efforts to make its brand not only an in-store experience, but also an online one.

The focus on e-commerce and strong inventory management saved the most recent quarter as stores temporarily shut due to the coronavirus outbreak. And Lululemon launched an online portal with workouts and fitness tips to keep its customers connected. While revenue as a whole still declined 17% during the period, e-commerce sales rose 70%. That's after 41% gains in e-commerce in the fourth quarter, so this already was a growing area prior to the outbreak. As for inventory, Lululemon won't have to cut prices to clear out old items. About 40% of the company's clothing may be sold into future seasons, meaning Lululemon is less likely to lose money on items it didn't sell during store closures.

Lululemon reported more good news in its most recent earnings call (on June 11), and this news just adds to the long-term optimism about the company. In athletic apparel, its gains in quarterly market share were among its biggest in recent years, Lululemon said, citing NPD data. It's important to note that the athletic apparel market is growing at a 5% compound annual growth rate to reach $248 billion by 2026, according to Allied Market Research's forecast. And finally, the next growth driver for Lululemon may be abroad. The company plans on quadrupling international business from its 2018 level by 2023. In the fiscal year ending Feb. 2, 2020, the company made about 11% of its revenue outside of North America.

The case for Walmart

Higher costs related to health and safety measures and employee pay weighed on Walmart in the most recent quarter. Though sales of lower-margin items like groceries soared, sales of higher-margin goods like apparel fell -- and that also hurt earnings. Still, the company delivered solid results. Total revenue increased 8.6% to nearly $135 billion, and Walmart's U.S. digital sales soared 74%, led by grocery pickup and delivery.

Walmart has made great efforts to develop its online grocery and delivery network, as demand for such services -- even prior to the current crisis -- has been climbing. Online grocery sales in the U.S. rose 22% last year, and this year, considering the coronavirus pandemic, a 40% increase is expected, Supermarket News reported (citing Coresight Research). Walmart has made it easier to shop, recently integrating its online grocery shopping app with its general Walmart one. So now, customers can place orders for any item sold at Walmart through a single app. Walmart said it's seen "good growth" in the number of people using its $98-per-year unlimited delivery service. Gains in online grocery shopping in the coming years may not be as steep as during the coronavirus crisis. But it's likely that a certain momentum will continue as customers have gotten used to the convenience.

Walmart has been steadily gaining strength, with annual revenue climbing since 2017. The company has also surpassed analysts' earnings estimates in three out of the past four quarters. In spite of this, the shares remain inexpensive. They're trading at about 23 times trailing-12-month earnings, compared to a P/E as high as 60 less than two years ago. Today, one of the best bargains at Walmart is the stock itself.

Lululemon or Walmart?

Both companies represent excellent additions to a retail stocks portfolio. However, Lululemon is likely to produce higher revenue growth faster. Though the shares have already gained 32% so far this year, I think there is a lot more to come in the long term. The strength of the general athletic apparel market, the momentum of Lululemon's digital sales, and the growth potential in international markets lead me to say now is the moment to get in on the action.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walmart Stock Quote
$132.53 (2.18%) $2.83
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$292.10 (4.49%) $12.54

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