Nike (NKE -0.36%) and Lululemon Athletica (LULU 2.64%) look like they're on divergent paths right now. The two growing athletic-wear companies reported elevated inventory during their most recent quarterly updates, but the respective management teams provided very different messages about what that means for upcoming financial performance.

Nike sees lots of discounts coming later this year but not so for Lululemon. Recent market turbulence has been a factor, but Lululemon stock has greatly outperformed Nike since the two updates.

If Nike's report and outlook were disappointing to you, Lululemon is worth a serious look right now.

A strong dollar and soaring inventory hurt some more than others

The Federal Reserve is aggressively hiking interest rates to try to tame inflation. A side effect of this is a record run for the U.S. dollar against other currencies. For companies like Nike and Lululemon, this means lower value from international sales.

To get an idea of the brutal workout the dollar is putting Nike and Lululemon through, just look at revenue. In Nike's fiscal 2023 first quarter (ended Aug. 31, 2022), revenue was up 4% year over year to $12.3 billion, but growth increased to 10% when excluding the effects of currency exchange rates. In Lululemon's fiscal 2022 second quarter (ended July 31, 2022), revenue was up 29% to $1.9 billion, or 31% on a currency-neutral basis.  

But adding to the currency exchange woes are ongoing supply chain issues. Nike had been running low on stock the last couple of years and was dealing with factory closures in Asia last year. It had also placed some early orders for future seasons. The result was a sudden flood of order deliveries.

Inventory value surged 44% year over year to $9.7 billion last quarter, and gross margin on products sold fell 2.2 percentage points to 44.3%. Discounting is now in full force and expected to last through at least the end of calendar year 2022.

Lululemon's inventory management, at least from the company's standpoint, is right-sized for current demand. The company has always tried to maintain a just-in-time inventory scheme, matching current stock with what consumers want, to minimize discounting. Gross margins fell to 56.5% last quarter, down from 58.1% last year, but most of that was due to air freight expenses rather than any promotional activity. Lululemon also reported a big jump in inventory, up a whopping 85% year over year to $1.5 billion.

However, Lululemon attributed the surge to an especially sparse amount of inventory last year as the primary culprit. Plus, it is steadily expanding its product lineup into new categories like footwear, which also necessitates the purchase of more merchandise.  

It's all in the forecast

The near-term outlook helps drive home the point on inventory and international revenue issues. Nike is anticipating a rebound in revenue growth to a low double-digit percentage in its fiscal second quarter, in spite of currency exchange headwinds. But because of discounting, gross margins will decline about 3.5 to 4.0 percentage points year over year, offsetting some of the strong growth outlook.  

Again, in contrast, Lululemon is guiding for sales growth of at least 23% year over year in its current quarter. Gross margin could fall 50 to 70 basis points (which would land Lululemon in the 56% to 57% range), but this is again due primarily to air-freight inflation and a moderation in the extremely low inventory levels the company was experiencing last year.

As of this writing, Nike stock trades for 23.5 times trailing-12-month earnings, versus 32.7 times for Lululemon stock. While Nike's brand remains incredibly powerful, I prefer Lululemon. Shares tout a 40% premium, but the business is expected to grow at nearly double the pace of Nike and is enjoying robust profit margins even in a difficult period for apparel and retail businesses. If you found Nike's results underwhelming, give Lululemon a serious look right now.