Sportswear companies Nike (NKE -1.26%) and Lululemon Athletica (LULU 1.43%) both face big risks over the next few quarters. The stocks have declined in 2022 on fears about slowing spending in the apparel space. Rising costs could pressure earnings, too, and there's a good chance that weaker demand will show up at just the wrong time around the core holiday shopping season.
If investors can look past these short-term issues, though, they could benefit from unusually low valuations for these two successful athletic apparel specialists. But which stock is the better buy right now? Let's take a closer look.
Better sales: Lululemon
Lululemon has all the characteristics of an attractive growth stock today. Sales gains accelerated to 29% in the most recent quarter and are being lifted by a combination of rising traffic and an expanding store footprint. The company posted a 28% revenue spike in the core U.S. geography last quarter, along with a 35% spike in the international segment .
Nike is more established, especially in China, and so its growth trends aren't as head-turning. Revenue for the fourth-quarter period that ended in late May rose just 3%. That figure will likely improve significantly when the company reports fiscal Q1 results in late September because pandemic lockdowns eased in many parts of China.
Yet, investors prioritizing sales growth will likely still be drawn to Lululemon, which has a legitimate shot at expanding its geographic presence while pushing into new categories like footwear, outerwear, and menswear.
Lower risk: Nike
Nike, on the other hand, will likely appeal to more risk-averse investors. The blue-chip giant's larger footprint should cushion the business against a recession if one should develop in 2022 and 2023. Nike also has the resources to continue pouring cash into marketing and advertising through any type of selling environment. The company spent $1.1 billion on these channels, which management calls "demand creation" expenses. That's more than half of the $1.9 billion in total sales that Lululemon reported in the most recent quarter .
Nike is also less risky from a valuation perspective. Investors are paying 3.8 times annual earnings to own the stock today compared to 6.4 for Lululemon. Sure, both of those valuations are far lower than they were a year ago. But Nike still seems like a relative bargain, especially if you think a prolonged demand slowdown is on the way.
The better growth stock
But Lululemon is the purer growth stock in this matchup. That fact shows up in metrics like sales growth, but also in gross profit margin, which has been steadily climbing and sits a full 10 percentage points above Nike's 46% rate.
LULU Gross Profit Margin data by YCharts.
The athleisure specialist has a good shot at pushing profitability further toward 60% of sales, too, as it releases more premium products in attractive niches like footwear. Its annual sales footprint has lots of room to expand from the current level of around $7 billion, on the way toward Nike's nearly $50 billion.
Sure, there are major risks to that bullish outlook, including a recession in the athleisure industry. But growth-stock investors have to be comfortable with volatility as they wait for market-beating returns to accrue over many years.
