Both Nike (NKE -0.18%) and Lululemon Athletica (LULU 2.66%) are widely recognized brands that customers love. In the ridiculously competitive retail sector, these companies continue to find ways to stand out from the pack, and that's a feature that should be attractive to shareholders contemplating where to invest their hard-earned capital.
With trailing 12-month revenue of $47.1 billion, Nike is a powerful consumer brand that has built up an image associated with a winning mentality. This is due to the company's incredible marketing prowess, partnering with top-notch professional athletes like LeBron James and Cristiano Ronaldo to push sales. The company's long operating history of consumer relevance gives me confidence that it will keep dominating the athletic apparel market a decade from now.
What should help propel Nike in its next leg of growth is its effort to sell to consumers directly on its apps or in its stores. The business wants to boost product innovation and speed to market, while building deeper connections with its customers. Nike currently has hundreds of millions of members in its digital ecosystem.
Despite what appears to be an otherwise healthy business, Nike has been dealing with some issues. In the most recent quarter, inventories in North America, the company's largest market, jumped 65% compared to the prior-year period due to early holiday orders and delayed shipments from suppliers. This will hurt profitability in the current quarter. To be fair, in its latest fiscal quarter, Lululemon's inventory balance shot up 85% year over year, demonstrating that no business is immune to the macroeconomic climate.
Over the past five years, Nike's stock has produced a respectable return of 67%, beating the total return of the S&P 500 by 10 percentage points during that time. But the shares are currently down 50% from their all-time high and now trade at a price-to-earnings (P/E) ratio of 25, which is roughly half as cheap as the trailing five-year average. As an industry-leading business that possesses one of the strongest brands in the world and still has opportunities to grow, this could be a solid investment.
Lululemon's business has thrived over the past couple years, which is impressive given the global supply chain challenges facing many companies. And the momentum hasn't stalled as sales increased 28.8% in the fiscal 2022 second quarter. Looking ahead, management expects revenue to double between fiscal 2021 and 2026 to $12.5 billion. Executives want to lean heavily on international growth and expansion of the men's segment -- both areas that Nike dominates.
Lululemon's brand-building strategy, which emphasizes grass-roots and community-focused marketing initiatives, is not nearly as costly as Nike's approach. This has resulted in outstanding profitability. In its most recent quarter (ended July 31), both Lululemon's gross margin of 56.5% and profit margin of 15.5% were better than Nike's.
But if there's one complaint investors can make about Lululemon, it has to be the $500 million purchase of interactive at-home fitness company Mirror in the summer of 2020. This acquisition was made during the height of the pandemic, when consumers were stuck at home and searching for ways to exercise. But the challenges of this industry now, as evidenced by Peloton's crashing stock price, suggests that Lululemon severely overpaid for Mirror.
Lululemon shares have generated a superb five-year return of 388%, crushing both Nike and the broader market by a huge margin. And even with the stock down 37% from its all-time high last November, it's trading at a P/E of 35. While this looks on the expensive side (at least compared to Nike), Lululemon's current valuation is well below its 10-year average of 43, demonstrating that investor enthusiasm may have cooled a bit.
Taking all things into consideration, I have to go with Lululemon as the better stock to buy today. Don't get me wrong; Nike is a fabulous business that has a long and storied history of success, not to mention the fact that it has been a winning investment for shareholders. But with a 10-year time horizon, I can't pick Nike over Lululemon as the one stock to own.
The areas where Lululemon lags behind Nike -- primarily its international presence and the men's segment -- are massive growth opportunities for the business as we look ahead. Lululemon's brand will only get stronger over time, plus it's a more profitable enterprise.
And yes, Lululemon does carry a higher valuation than Nike, as shown by the P/E ratio, but I think this is justified given the company's tremendous performance throughout the pandemic, as well as its long-term prospects. This is why Lululemon is the better buy right now.