Better Buy: Nike vs. Chipotle

Today's investing landscape looks a lot different than it did just a few months ago; companies that were seeing booming sales are now dealing with major declines, and it's not clear when we might see a shift back to gains.

Nike (NKE -0.74%) and Chipotle Mexican Grill (CMG 6.33%) are two leading companies in their sectors that have experienced setbacks as a result of the pandemic, but of a different nature. Which one is a better buy today?

The case for Nike

Nike's taken the top spot in athletic apparel and shoes for decades. And as athleisure has become more prominent (contributing to the demise of iconic menswear retailer Brooks Brothers), it's become tops in overall apparel sales and popularity as well.

Image source: Nike.

Nike was seeing strong growth before the pandemic, but sales came crashing down as the COVID-19 pandemic spread worldwide.

Note: YOY=year over year. Data source: Nike.

Digital growth, however, was about double what it has been over the past year. While stores were closed, Nike put its full force into expanding digital, including offering free access to apps and product launches. The emphasis on digital was so forceful that, even when stores began to reopen in May, digital growth continued to post triple-digit gains. And since stores have reopened in China, overall sales have been increasing.

Although the swoosh might seem ubiquitous, there's still plenty of room for growth. The company hired former eBay executive John Donohoe this year as CEO and is leveraging his tech experience to bring the retailer fully into the digital sphere, and Nike's upping its digital offerings. It's focusing on combining the digital and in-store experiences with community, where it sees the greatest opportunities. Donohoe said "Connected data, inventory and membership will give consumers greater access to the best of Nike with more speed and convenience than ever."

To that end, it has several apps that all connect to foster a customer community, and it recently piloted a new concept store in China that creates a customized digital experience for customers both online and in stores. 

In the meantime, although the company showed a loss, its cash position is solid, with $12.5 billion in total liquidity. And it's lead in sales is so high as compared to other activewear companies that it would be hard to catch it in the near-term. 

With Nike's market dominance and its nonstop launching of innovative products, it's likely to see sales reach prior levels and higher, but that may not happen for a while. The company is streamlining inventory to meet current demand and avoid promotions, but that means sales won't reach pre-COVID-19 levels in the short term.

The case for Chipotle

Chipotle has made a name for itself in what might be considered a pretty narrow niche of Tex-Mex fare, but it's been able to grow its business from one store 25 years ago to just under 2,600 today through its platform of high-end fast food, foodservice innovations, and an emphasis on fresh ingredients that met a growing customer demand.

The restaurant stock consistently delivers double-digit revenue growth through a combination of high comps and new store openings, and while additional store openings were paused over the U.S. lockdown, the company has 49 restaurants under construction in addition to the 28 opened year to date.

Image source: Chipotle Mexican Grill.

Chipotle sales grew 8% in the first quarter, lower than usual, while the pandemic shutdowns were at their height.

Where are its growth opportunities? One is the digital market, which was gaining share before COVID-19 and picked up steam as the pandemic spread through the U.S.

Note: YOY=year over year. Data source: Chipotle Mexican Grill.

Just in March, the company registered a 103% increase in digital sales, representing 37.6% of total sales.

CEO Brian Niccol also sees tremendous opportunity for further growth to more than double the number of U.S. restaurants, which currently total 2,580. That projection doesn't include international growth or potential acquisitions. 

Niccol himself has many years of experience building up foodservice brands and turned Chipotle around after it had fallen out of favor due to an E.coli food contamination scare.He assumed the CEO role after a precipitous stock drop, and shares have gone up more than 200% since he took over.

Chipotle isn't worried about cash like companies that are seeing declining sales. It ended the first quarter with close to $1 billion in cash and short-term investments and no debt. Its focus is on conserving its cash while investing in innovations that serve its customers in the pandemic environment, such as the new drive-thru "Chipotlanes" which it is adding to some stores.

The verdict

Nike and Chipotle are both excellent companies with solid plans to continue growing into the future. Nike's growth isn't as high-octane as Chipotle's, since it's been around a lot longer, while Chipotle is a relatively young company. That's one reason Nike might be a safer stock, but it still has plans for expansion.

Despite its youth, Chipotle has proved its mettle, gaining straight through a pandemic that has forced other companies to close and put other restaurants on the defense. Nike, on the other hand, had a very rough quarter, and although it is weathering the storm and will emerge intact, it's just not clear when that will be.

In terms of value, Chipotle is trading at 90 times earnings, and its share price recently broke through $1,000 for the first time. 

Nike is trading at 60 times earnings after its disastrous fourth-quarter loss, which suggests the share price didn't fall in tandem with the poor quarterly results. While shares may not be a great value at the current price, which is about level with its 2020 starting price, it shows investor optimism about the company's future prospects.

While I think Nike is a great long-term stock pick, in the current atmosphere and with both companies' shares highly valued, I'd go with Chipotle as the better buy.