Footwear and luxury home furnishings don't have much in common, but Nike (NYSE:NKE) and RH (NYSE:RH) -- formerly known as Restoration Hardware -- offer investors plenty of growth in their respective markets.

Here's a comparison of the investment cases for both companies to determine which stock is the better buy.

The case for Nike

Nike has one of the most recognized brands in the world, which has delivered market-beating returns to investors. Footwear comprises about two-thirds of its revenue, but the company also has a growing apparel business, where management sees a lot of potential on the women's side. 

Nike has spent the last several years improving its supply chain to get products to market faster. This helps Nike meet consumer demand in a timely manner while certain styles are popular. As part of this effort, Nike is investing in technology, such as RFID (radio frequency identification) and personalization to better anticipate consumer demand and improve efficiency. Ultimately, this should help Nike accelerate growth and generate a higher profit margin. 

A man in a business suit highlighting the high point of a rising stock chart.

Image source: Getty Images.

Nike is experiencing tremendous e-commerce growth, which made up 30% of the business in the most recent quarter. The digital business was already Nike's fastest-growing channel before the pandemic, but digital sales surged 82% in the fiscal 2021 first quarter ending in August. 

E-commerce could comprise half of Nike's annual business over time, which would boost profits, since digital sales generate higher margins. Nike will continue growing its digital business through investments in personalization and membership, creating a more loyal base of shoppers. 

Revenue grew 5% annualized from fiscal 2015 through fiscal 2019, which is not much. But earnings have grown faster over that period thanks to improving margins. Analysts expect Nike to grow earnings by 25% annualized over the next five years, which explains why the stock sports a high forward P/E of 44.    

The case for Restoration Hardware

Over the last few years, RH has been successful elevating its brand as a leading luxury home furnishings retailer, offering a range of products across categories, such as lighting, textiles, bathware, décor, and outdoor furnishings. As of February 2020, RH operated a total of 83 retail locations, including 22 design galleries and 15 Waterworks showrooms. 

In recent years, RH has been opening eye-catching galleries in iconic locations to position itself as a world-class retail brand. Additionally, its sales strategy extends to e-commerce, source books, trade, and contract sales channels. 

RH views the range of its touch points for customers as an important advantage, since customers typically engage with RH across more than one of these channels, which helps distinguish the RH experience from other retailers. 

Most importantly, CEO Gary Friedman has not lost sight of investing in growth while still producing healthy profits. In fact, RH has grown operating profit much faster than Nike over the last five years, thanks to making significant progress to improve margins. That largely explains why RH stock has more than tripled in value.

NKE Chart

NKE data by YCharts

Both Nike and RH have experienced sales pressure during the pandemic. But RH has seen demand surging recently, as home spending picks up. While revenue was roughly flat year over year in the second quarter, total company demand increased by 16%.

Core demand was up 7% in May, accelerating to 47% in August. But management expects revenue growth to lag behind demand in the short term due to limited supply. 

Which is the better buy?

Looking at both companies' addressable markets, both companies offer plenty of headroom for more growth.

Nike generates $37 billion in annual revenue but operates in a $300 billion global sportswear industry that has grown steadily over time. The industry has increased sales at a mid-single-digit per year increase since 2007, consistent with Nike's annualized growth from fiscal 2015 to fiscal 2019.

RH generates $2.5 billion in revenue in a market valued around $30 billion, which is expected to grow in the low single digits per year. 

Looking ahead, RH expects revenue to grow between 8% and 12% annually over the long term, while profits should increase between 15% and 20%. These targets are slightly higher than Nike's long-term forecast.

Before the pandemic, Nike was targeting high-single-digit revenue growth and mid-teens earnings-per-share growth through fiscal 2023.

Given that both companies are roughly even on growth prospects, RH gains an advantage over Nike based on its lower valuation. Across different valuation metrics, RH is the better value, whether looking at forward P/E, price-to-free cash flow, or enterprise value-to-EBITDA.

NKE PE Ratio (Forward) Chart

NKE PE Ratio (Forward) data by YCharts

Overall, Nike and RH both have the qualities of being well-managed businesses that can fuel investors' returns. But with RH, investors are getting a company that is potentially disrupting how things are done in the home furnishings market, thanks to the visionary leadership of Friedman.

Moreover, RH offers investors plenty of growth potential at a much lower valuation. Therefore, RH is the better buy at current price levels.