Most retail stocks suffered during the coronavirus crisis as physical stores closed and shoppers stayed home. Amazon (NASDAQ:AMZN) and lululemon athletica (NASDAQ:LULU) fared better than most. Amazon saw demand soar, driven by essential goods. And Lululemon's online sales took off.
As a result, investors have favored the shares. Through Tuesday's close, Amazon has climbed 71% this year, while Lululemon has increased 36%. And both are trading close to their record highs. These companies' track record of growth and their ability to navigate the health crisis mean I'm willing to buy shares of both at this level. But right now, my task is to choose one. Let's take a closer look before making any decisions.
Amazon saw demand surge so much during the height of the coronavirus crisis that the online retailing giant created 175,000 new jobs. Stay-at-home orders meant consumers favored shopping online. Amazon hasn't released recent Prime membership numbers, but it's likely subscriptions rose, as the unofficial lockdowns also meant people had more time to read and watch movies. Beyond free grocery delivery, Prime membership offers access to books, movies, and music.
In the second quarter, Amazon reported a 40% increase in net sales from the year-earlier period, and net income doubled to $5.2 billion. Revenue may not grow as quickly once the coronavirus crisis is over and shoppers return to stores. But a look at Amazon prior to the crisis -- more than a decade of annual revenue growth -- makes me confident that demand for the company's products and services will continue to increase.
What makes Amazon unstoppable, though, is the company's successful diversification. Amazon generates sales from general merchandise, grocery, entertainment, devices, and the crown jewel: Amazon Web Services (AWS). AWS's operating income currently represents 57% of Amazon's total operating income, making it a key motor behind this online powerhouse. AWS's sales growth has slowed, rising 29% in the second quarter compared to a 49% gain in the same period two years ago. But I'm not worried, considering AWS's market dominance. AWS holds 33% of the global cloud infrastructure services market, more than its two closest competitors combined, according to Synergy Research data.
Lululemon, the seller of yoga-inspired clothing, began reopening stores in the second quarter. Overall sales showed recovery, increasing 2% after a 17% decline in the first quarter. And online sales soared 155%, building on the first quarter's 68% gain.
The company's success in managing the crisis so far is due to its strength in e-commerce and connecting with fans online. For instance, customers could not only shop online, but could practice yoga and find tips on the Lululemon's Sweatlife online community while they followed stay-at-home orders. Now, Lululemon is making a smart move: It's tailoring its business to what's happening in the shopping world at this stage of the coronavirus crisis.
Lululemon is accelerating investments in e-commerce such as boosting fulfillment capabilities and improving the online platform. The popular "buy online, pick up in store" has become "buy online, pick up at curbside." Since Lululemon stores tend to be small, and lines quickly build up, the company launched a virtual waitlist: You receive a text message when it's your turn to enter the store. In August, about 400,000 guests used the waitlist. And finally, Lululemon recognizes that the customer is spending more and more time at home. So, the company has designed new styles for "out-of-studio" wear.
Is it Amazon or Lululemon?
Both companies are poised to exit the crisis as well as they traversed it. And I expect both to reward long-term investors with share gains in the years to come. But if I had to choose one to buy right now, I would go for Amazon. Here's why: I'm concerned about how clothing retailers, such as Lululemon, will fare this holiday season. And any weakness could weigh on the shares.
As we all know, the holidays mean sales. High-end retailers that suffered during the crisis may be even more promotional than ever as they try to clear inventory and win back customers. So, competition for the consumer's dollar will be high. At the same time, many Americans have lost their jobs or are worried about the economy. They might wrap up one pair of Lululemon leggings for a gift -- but not two.
At Amazon, the diversity of businesses means holiday sales at other retailers are less of a threat. The fact that customers can order a variety of items right on Amazon is another plus. That's why, if I have to choose, I'll favor buying Amazon shares right now.