Nike (NKE 0.38%) has held a firm grip over athletic wear for the past several decades, and it won't be loosening it any time soon. However, relative newcomer Lululemon Athletica (LULU 1.09%) has jumped to the apex of premium yoga clothes and challenges Nike on its home turf. In a contest of the top activewear ateliers, which is the better buy? Let's see.

Athleisure is the new black

Both Nike and Lululemon have been at the top of their game as "athleisure" -- wearing athletic wear as casual clothing -- has become more fashionable. In the pandemic era, it's now positively standard to walk around in yoga pants and hoodies. The great office-clothing toss last year led to the folding of iconic menswear house Brooks Brothers along with several other brands as more people worked from home and preferred to lounge around in comfortable clothing. Even in the office, casual wear has become more acceptable.

This is all a good thing for Nike and Lululemon, the latter of which also offers a small line of popular dress pants in activewear fabrics to bring comfort to the boardroom. Yet both companies have still had to navigate their way through the challenges of the pandemic.

Jayson Tatum outfitted in Nike on the basketball court with a ball.

Image source: Nike.

Lululemon saw a small year-over-year sales dip during the pandemic, but it has recovered quickly for two main reasons. One was the shift toward athleisure and the second was its strong digital strategy, capturing the online market when stores were closed. Both of these factors remain key elements of the company's current, robust performance. 

In addition, Lululemon is smaller, giving it more agility. And it targets a higher-paying clientele who can afford to redo their wardrobe on a whim, especially when they need more activewear while they're using their Peloton machines.

Nike, on the other hand, had a more dramatic setback during the pandemic, probably due to its size and mass appeal. But the company has rebounded nicely with sales eclipsing pre-pandemic levels. Nike has leaned into a direct-to-consumer strategy that leverages its unmatched brand strength through its loyal global customers.

Supply chain challenges and more

The pandemic isn't over, though, and both companies are seeing problems begin to crop up again. Nike was one of the first retailers to identify supply-chain issues in its fiscal first-quarter earnings report in September, heralding worse times to come. Its stock tanked after that report, which was otherwise largely solid, showing a 16% year-over-year sales increase.

Nike CEO John Donohoe observed that "consumer demand for Nike remains at an all-time high" including a 130% increase in use of its app over the year-ago period; however, he said that the supply "situation deteriorated even further in the first quarter," leading management to lower its second-quarter outlook. Indeed, Nike eked out a 1% year-over-year sales increase in Q2.

Still, other metrics were strong, including an 11% year-over-year increase in digital sales and a 27% increase in member engagement. Digital sales were particularly pronounced in North America, increasing 40% to become 30% of total sales in that region. This is marked progress, but it was marred by a low single-digit, overall sales rise and similar outlook for the third quarter.

Lululemon was less affected by the supply chain until now, as demonstrated by a 30% year-over-year sales increase in the third quarter. However, since that report, CEO Calvin McDonald has given a grim update, saying that fourth-quarter revenue was likely to come in at the bottom of its guidance of $2.125 billion to $2.165 billion -- although that's still 25% over last year's revenue. He said that net income would be at the low end as well, citing "increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations." Investors didn't punish the stock too much, sending it down slightly.

Which stock is the better buy?

Let's first say that these are both excellent stock picks. Nike is the dominant player with such a strong lead that it would be hard to catch, especially because it constantly innovates and improves both its product line and strategy. Lululemon is increasing its reach and catering to its clientele, offering products that fit its customers' lifestyles.

However, they each offer something different for your portfolio, which leads me to determine which is the better buy. Nike's growth is slowing, and considering its high price tag, it's become more of a value pick. With the stock valued at 40 times trailing 12-month earnings, investors shouldn't expect high gains in the near term. In the long term, however, Nike is a solid value pick.

Lululemon, on the other hand, is a small company that's still posting strong growth. Its stock price has tumbled over the past few months and is now trading at 52 times earnings -- more expensive than Nike, but justifiably so. For higher growth, I would go with Lululemon.