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3 Reasons Why Lululemon Has the Edge Over Nike

By Neil Patel - Jun 8, 2021 at 8:00AM

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Based on its recent performance, the growing athleisure brand is a force to be reckoned with.

lululemon athletica (LULU 1.49%) reported first-quarter 2021 results Thursday after the market close, crushing Wall Street revenue and earnings expectations. But despite its strong numbers, the stock has significantly lagged its colossal foe in the industry, Nike (NKE 1.73%), over the past 12 months. 

Lululemon does, however, have three major advantages over The Swoosh. Let's dive into the recent quarterly numbers and see what they are. 

Three happy people standing on yoga mats.

Image source: Getty Images.

1. Larger e-commerce business 

During the 13-week period that ended May 2, Lululemon's direct-to-consumer sales jumped 55% to $545.1 million. This segment, which the company also calls e-commerce, accounted for around 44% of revenue in the quarter, which is actually down from 54% in Q1 2020, when most stores were closed due to the pandemic. 

It's well known that Nike has been making a huge digital push over the past several years, but it is still behind Lululemon in this category. In Nike's most recent earnings call (third-quarter 2021), CFO Matthew Friend highlighted that "digital now exceeds 35% of [our] total business." The company's long-term target is to reach a 50% digital sales mix, something Lululemon has already achieved. 

This is important because as more transactions are done online, Lululemon benefits from higher margins. Overhead expenses (such as rent and payroll) of operating a physical store are avoided, meaning more money flows to Lululemon's bottom line. And this leads me to the next point. 

2. Higher gross margin 

Lululemon's Q1 2021 gross margin (revenue minus cost of goods sold) of 57.1% far exceeds Nike's 45.6%. This is not a new phenomenon -- since Lululemon went public in 2007, it has consistently had a higher gross margin than Nike. 

The fact that more revenue is derived via the direct-to-consumer channel only supports this trend. Furthermore, Lululemon rarely sells items at marked-down prices, which helps the company's premium brand perception. Nike, on the other hand, leans heavily on wholesale partners, such as Dick's Sporting Goods or Foot Locker, to move its products. 

So, because Lululemon sells most of its products directly to customers at full prices, it commands a higher gross margin, which results in pricing power. Inventories grew 17% in the quarter, compared to a revenue increase of 88%. Nike's inventory balance, however, rose at a faster rate than its sales. This efficiency and control over distribution lets Lululemon run a tight operation. 

3. Bigger international opportunity 

Nike is truly a global brand, as a substantial 66% of sales come from outside North America. This is in stark contrast to Lululemon's geographic split. As of Jan. 31, just 14% of the athleisure pioneer's business came from international markets.  

International revenue for Lululemon surged 125% in the quarter, far outpacing the gain in North America. And CEO Calvin McDonald acknowledges this as a massive opportunity for the brand. "I can see a time in the near future where our international business grows in size to be equal to our North America business," he claimed on the earnings call. 

With plans to open 35 to 40 (out of 45 to 55 total) net new stores in international markets in fiscal 2021, Lululemon will have a chance to bolster brand recognition overseas, particularly in the Asia-Pacific region. 

Some final thoughts 

The athletic apparel business is extremely competitive. Consumer tastes are always changing, so creating a brand that resonates well with shoppers is absolutely vital to a company's long-term success. 

Lululemon is clearly succeeding at this, and it is now showing strength in some very important areas of its business compared to its larger rival. Although it still pales in comparison to Nike's enormous $210 billion market capitalization, Lululemon's prospects remain very bright. 

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$321.69 (1.49%) $4.71
NIKE, Inc. Stock Quote
NIKE, Inc.
$116.07 (1.73%) $1.97
Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
$107.24 (2.03%) $2.13
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
$31.52 (2.21%) $0.68

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

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