Nike (NKE 1.36%) and Levi Strauss (LEVI 0.22%) both suffered a drop in sales at the onset of the pandemic earlier this year, but Levi was hit much harder. Over the last year, Nike's stock has significantly outgained that of its apparel peer thanks to strong performance from its digital sales channels, which have grown faster than Levi's direct-to-consumer business.
But which of these two stocks is likely to deliver the best returns for investors from here?
Nike is growing faster
Nike has accomplished much more in the athletic apparel business in just half a century than Levi Strauss has managed over the last century and a half.
Image source: Getty Images.
Nike first sold shoes under its trademark brand in 1972. Yearly revenue has climbed from less than $2 million nearly 50 years ago to $37 billion today, with footwear still providing nearly two-thirds of the company's sales. While it is known for its performance running shoes, the classics -- including the Air Force 1, Air Max 97, and Air Jordan 1 -- have been the hot sellers this year.
While the 501 jean is just as iconic as the swoosh logo, Levi's hasn't been able to reach the same scale as Nike. Levi's started making denim in 1873, but even with a long history, the company only produced $4.6 billion in revenue over the last four quarters.
The athletic apparel industry is much larger than the market for denim, which has opened more growth opportunities for Nike. It has also fared better during the pandemic than Levi's, with revenue growing fiscal year to date through November, while Levi's has suffered a steep revenue decline.
NKE Revenue (TTM) data by YCharts
Nike's revenue rose 4% year over year through the first six months of its fiscal 2021, a period that ended Nov. 30. That's much better than Levi Strauss, which saw revenue decline 27% in its fiscal third quarter (which ended Aug. 23), as well as through the first three quarters of its fiscal 2020. Levi's blamed those declines on reduced retail traffic due to COVID-19 and store closures.
Nike experienced the same problems, but it was able to maintain faster revenue growth largely because of its ability to continue releasing new sneakers, and also due to its prior work building a robust digital platform.
Nike's digital business is second to none
Nike Direct, which includes sales from company-operated stores, Nike.com, and Nike apps, grew 84% year over year in the fiscal second quarter. That was the third straight quarter that Nike Direct has reported 70% or better growth.
By comparison, Levi's direct-to-consumer business, including the company's e-commerce site and online sales from wholesale partners, grew 50% year over year in its most recent quarter.
While Levi expects that its direct-to-consumer channels will eventually provide a third of its revenues, Nike Direct already accounts for 30% of Nike's total revenue, and management sees a path to increase that to half of the business.
Nike is investing in transforming itself into a digital-first company. It acquired Celect last year, bolstering its data science and demand-sensing capabilities, and is starting to invest in digitally connected stores that are designed to bring a personalized shopping experience to shoppers based on their app usage and other data analytics.
Nike's lead in the digital space is enough reason alone to side with the swoosh over the denim stalwart. While Levi Strauss is making the same types of investments in personalization and omnichannel shopping, Nike generates significantly more profit to reinvest in its digital operations.
NKE Net Income (TTM) data by YCharts
The most appealing aspect of Levi's stock right now is its lower valuation. With a forward price-to-earnings ratio of 21, it looks more attractive than Nike, which is trading at a forward P/E of 48. But I believe investors looking for the best compounding machine for their nest egg will be better off paying a higher premium for shares of Nike.
Nike's lead in the large and growing sportswear industry, and its investments in digital sales channels, position it better for the ongoing consumer shift toward e-commerce.
Nike is a better business
While shares of Levi Strauss have outperformed Nike in the last six months and may continue to head higher in the short term as it recovers from the pandemic, I believe Nike can outperform Levi Strauss over the long term.
Nike is further along in its digital transformation, which should boost profits since digital sales generate higher gross margins. This explains why analysts expect Nike to grow earnings per share at an annualized rate of 25% over the next five years, but have much lower growth expectations for Levi Strauss.
What's more, Nike has opportunities to attract more customers to its products through its interactive fitness apps such as Nike Running Club and Nike Training Club. That ability to cross-sell provides Nike with chances to deepen its relationships with its customers. Levi Strauss doesn't have any similar opportunities available to it.
If you want the best growth stock to fuel your returns for retirement, I would stick with Nike.
