Nike (NKE 1.05%) has long been a leader in the athletic apparel industry. Developing a deep connection with consumers by using genius marketing tactics and exceptional product design has built it into a $250 billion juggernaut today.
But its supremacy is being challenged by younger and smaller Lululemon (LULU -0.09%), a thriving business that is making major strides in new product categories and markets.
Is Lululemon a better stock to buy right now than Nike? Let's take a closer look.
Image source: Getty Images.
Quality matters
Both of these companies sell high-end sports apparel, but Lululemon's gross margin of 57.2% has consistently exceeded Nike's over the past decade. This demonstrates that the former is recognized as a more premium brand than the latter, and consumers are willing to pay up for its expensive merchandise.
When it comes to sales and net income growth, Lululemon also wins. Over the five-year stretch before the pandemic, it more than doubled annual revenue and profit. Nike's sales and net income rose 41% and 48%, respectively, from fiscal 2014 through fiscal 2019.
In its most recent fiscal quarter, digital orders represented 25% of Nike's overall sales. The Oregon-based company's goal is to one day have half of its revenue come from digital channels, a feat Lululemon was able to achieve during the pandemic. That figure has since normalized to 40% of total sales.
Then there's the disrupted global supply chain. Lululemon's management team admitted that demand is definitely outstripping their supply on hand and that the business would be stronger without the problems. But they still upgraded revenue guidance for the full fiscal year to $6.27 billion, up from $6.23 billion at the midpoint.
Thanks to fully reopened and operational factories in Vietnam, Nike's woes have improved in the latest quarter. But sales are still only expected to jump mid-single digits in fiscal 2022. Furthermore, because a larger chunk of Nike's revenue comes outside North America (61% compared to Lululemon's 15%), it has a more complicated supply chain to manage. Nonetheless, both of these companies expect to have a robust holiday shopping season.
Nike, however, does win the battle when it comes to returning cash to shareholders. It has raised dividends for 20 straight years and has a sizable share repurchase program going. While Lululemon doesn't currently pay a dividend, it did buy back almost $500 million worth of stock through the first three quarters of fiscal 2021.
And according to Piper Sandler's most recent Taking Stock With Teens survey, Nike's brand is much more powerful than Lululemon's. Among the 10,000 teenagers polled, Nike was by far the most popular brand in both the clothing and footwear categories. Having a nearly 50-year history of cultural influence certainly helps.
Valuation also matters
The stock market is infatuated with fast growth, so it's not surprising that Lululemon's price-to-earnings ratio of 56 is much higher than Nike's 42. Value investors might choose Nike based entirely on the valuation multiple. But I'm a quality-focused investor above all else, so with the arguments I've outlined above, I think Lululemon's premium price is worth paying up for.
The business is a fraction of the size of Nike today and has the potential for incredible growth in the coming year and beyond. Nike has undoubtedly been a winning company supported by an innovative culture and a superb marketing strategy. However, it's a more mature business than Lululemon is right now. In other words, Lululemon still has a massive runway to take market share in the global athletic apparel industry.
Therefore, I believe the possibility of achieving outsized returns are higher for investors who buy shares of the athleisure pioneer. Lululemon wins this debate for me.
