Better Buy: Nike vs. Gap

Nike (NKE 1.81%) and Gap (GPS +0.56%) are among the most recognized American clothing brands, and both have had a difficult year. Like other retailers, they've faced store closures and the fact that discretionary purchases weren't a priority during the worst stages of the coronavirus pandemic.

Gap has an additional challenge. The retailer has struggled in recent years -- and just as it named a new CEO to launch a recovery, the coronavirus outbreak hit.

In spite of the challenges to revenue and earnings, though, both companies' shares have recovered from their March lows. In fact, they're both up for the year. Let's take a look at each company to see which of these consumer stocks makes the best investment right now.

Image source: Getty Images.

Nike

Nike's overall sales slid during the coronavirus outbreak. However, the company had developed a strategy in back in 2017 to boost e-commerce and direct-to-consumer sales, and the move to digital has been working extremely well.

For perspective, the athletic gear maker saw online sales soar as the pandemic swept globally. In the most recent quarter, digital sales gained 82%. In fact, Nike's online sales made up 30% of overall sales in the period. This achievement is three years ahead of management's own expectations. 

The company also has extended the customer's online experience beyond shopping. The Nike Training Club and Nike Run Club apps keep fans connected to the company while doing what they love best -- sports. Nike said more than 50% of its members worldwide started using the training app in the most recent quarter. That's the highest percentage ever.

Membership is a key part of Nike's strategy. The company aims to use its knowledge of its customers to better serve them in store and online.

Moving to the numbers, Nike has a long history of strong margins and annual profit. Though they declined as Nike put into place its direct-to-consumer strategy, margins and profit have grown throughout most of the past decade. And just before the coronavirus outbreak, margins and profit were on the rise once again.

Data by YCharts.

Gap

Gap is the owner of the eponymous Gap brand, as well as the Banana Republic, Old Navy, and Athleta brands. Sales have been rocky in recent years as consumers turned to online retailers and made fewer trips to the mall -- where many Gap stores are based.

Old Navy, with its lower-priced casual clothing, and Athleta, with yoga and athletics-inspired apparel, have been more resilient. In the most recent quarter, for example, Old Navy net sales fell 5% and Athleta sales rose 6%. That's compared to declines of 28% for Gap and 52% for Banana Republic.

Gap's new CEO Sonia Syngal and her team recently announced a three-year plan to focus on strengths and shed weaknesses. The company is closing 30% of Gap and Banana Republic stores -- a total of 350 -- as part of the plan. By 2023, 80% of the company's revenue will come from e-commerce and stores that aren't located in malls. And by that time, Old Navy and Athleta will make up 70% of Gap's sales. That's compared to 50% today.

All of this sounds good. The focus on Old Navy and Athleta makes sense because they've shown strength. Consumers have shifted to casual and comfortable clothing. And here's an added plus: Gap says Old Navy and Athleta are its highest-margin brands. But it's still too early to say whether Gap will be able to attain its ambitious goals. The popularity of casual clothing means Gap may face more competition than ever in this area. And from a logistics point of view, will sales really gain with a switch to off-mall locations? There might be more traffic in these spots, but Gap still will face competition from other retailers there -- and online. Macy's (M 0.03%), for instance, also is opening off-mall stores and is putting a new focus on casual clothing. 

So will it be Nike or Gap?

While investing in Gap's recovery is tempting, I'm not ready to go for it at this point. The share price has climbed 29% this year and recently surpassed Wall Street's average 12-month estimate. Gap is only at the start of its recovery plan. And today's retail environment is difficult. That's why I think Gap shares have gone too far too fast.

Nike shares have also increased, for a 26% gain so far this year. But here I'm not hesitant. Nike went into the coronavirus outbreak in a position of strength. Revenue rose 10% in the quarter prior to the health crisis. And Nike's 2017 plan positioned the company to benefit from the online shopping growth we're seeing today.

Digital sales may not continue to soar as much as they did during the height of the lockdowns, but they should remain strong. U.S. online retail sales are forecast to rise 39% from last year's level to about $476 billion in 2024, a Statista report shows.

And finally, let's take another look at annual profit and margins for the past decade prior to the coronavirus outbreak. This time, we'll directly compare Nike to Gap. The result? Nike has a better track record. The company has surpassed Gap by both measures in terms of level and growth. 

NKE Profit Margin (Annual) data by YCharts

That's why, according to my scorebook, Nike is the winner of this match of retail stocks.