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Can Lululemon Unseat Nike as the Top Activewear Company?

By Jennifer Saibil - Dec 19, 2020 at 6:55AM

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The young athletic-apparel company is growing faster than the established champion. What does that mean for investors?

Nike ( NKE 0.03% ) is the undisputed leader in athletic apparel. Its sales outshine competitors such as Adidas ( ADDYY -0.18% ), Under Armour ( UA -4.97% )( UAA -4.14% ), and lululemon Athletica ( LULU -1.59% ).

But lululemon's stock performed far better than Nike during the pandemic, and over the last few years, thanks to higher growth in sales and profit. Can lululemon oust Nike for the top spot?

A history of coming out on top

It won't be easy to knock Nike off its pedestal. Not only was Nike's $37 billion in 2020 revenue greater than any other activewear company, it was more than any other U.S. apparel company. 

Sales dropped 38% in the 2020 fourth quarter, rounding out an otherwise fantastic year. But they rebounded in the 2021 first quarter, falling only 1%.

Three women walking and wearing Nike workout clothing.

Image source: Nike.

Athleisure is a growing trend, accelerated by COVID-19, since people are working from home and ditching traditional office wear in favor of comfortable alternatives. Nike is reaping the benefits. CEO John Donohoe mentioned four keys to further growth in the first quarter conference call: product innovation, connection with customers, a focus on digital, and the store experience. Digital sales make up 30% of the total, which in management's eyes, is three years ahead of schedule, and it's expected to increase further.

Nike has found a recipe for success that makes it hard to compete with.

Leading yoga enthusiasts into the future

Lululemon has been one of the biggest apparel success stories in the past few years. The company typically sees 20%-30% in quarterly growth and has all of the elements that work in today's shopping atmosphere. Its products are developed with patented fabrics to make living the "sweat life" comfortable. The company offers live and online classes for fitness enthusiasts and has a strong omnichannel program. Digital makes up 43% of the total, although that went up while stores were closed.

Lululemon's sales fell 17% in the second quarter, a much better drop than Nike's and similar companies. It improved to a 2% increase in the second quarter, and third-quarter revenue came in at  $1.1 billion, a 22% increase over the prior year. International sales grew 45%, and sales in China surged 100%. This shows that lululemon has completely recovered from pandemic declines.

A woman wearing active clothing rolling up a yoga mat.

Image source: Getty Images.

What does it have over Nike? It's more focused on a niche millennial gym-loving crowd, giving it momentum in that area. But at the same time, that curbs its broad appeal and limits it from reaching a greater market. Nike has been able to develop a premium image and at the same time, reach a mass audience, something that may be more challenging to a brand like lululemon.

Can lululemon take the lead?

Can lululemon keep up that kind of growth? It's unusual for a company to keep up double-digit growth long term, but lululemon is definitely a candidate for continued high growth, at least for the short term. 

If the company's revenue would continue to grow consistently at 20% annually, it would take more than 12 years to catch up to where Nike is today. But Nike isn't planning to stay stagnant, and all signs are pointing to more growth for the top activewear company.

Lululemon is a great company, but Nike's leading position is vastly ahead and will be hard to catch. Their stocks have both been good to investors, Nike gaining 122% and lululemon gaining 376% over the past three years. But the former's not too far behind the latter in 2020, gaining 35% next to lululemon's 48%. With lululemon's absolute sales way lower but growing faster than Nike's, its stock has the potential to grow faster.

Nike reports second-quarter earnings on Friday Dec. 18, and investors will be watching to see if it, too, made a quick recovery like lululemon. But even if Friday's report isn't as fantastic as lululemon's and it takes Nike longer to swing back to growth, it will keep its top spot for the near future and remains a great long-term stock pick.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$455.87 (-1.59%) $-7.39
NIKE, Inc. Stock Quote
NIKE, Inc.
$169.91 (0.03%) $0.04
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$23.38 (-4.14%) $-1.01
adidas AG Stock Quote
adidas AG
$143.78 (-0.18%) $0.27
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$19.90 (-4.97%) $-1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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