Nike (NKE -0.74%) and Lululemon Athletica (LULU -1.26%) are both champions when it comes to delivering earnings and share performance growth over time. And they both took a very important step during the earlier stages of the pandemic: They ramped up their digital platforms and solidified already strong relationships with their customers.
But today, share price performance isn't a reflection of that. Both stocks have been on the decline amid concerns about the overall economy -- and how problems like rising inflation might hurt retailers. The good news is that this creates a buying opportunity for two solid, long-term players. But if you could only invest in one right now, which represents the better buy? Let's find out.
The case for Nike
Nike's recent news hasn't been the brightest. The athletic apparel and footwear giant is struggling with too much inventory -- and a lower gross margin. The inventory situation is linked to supply chain disturbances. To remedy the problem, Nike plans on markdowns, and these will further weigh on margins.
In fact, markdowns, higher transport costs, and negative currency headwinds will result in a 200- to 250-basis-point decline in fiscal 2023 gross margin, the company predicts.
That said, Nike's digital sales are climbing. Nike digital posted double-digit growth across North America, Europe, Asia, and Latin America in the fiscal first quarter. Higher traffic and growth in order value contributed to the gains. Nike's direct sales to customers are also on the rise. Excluding the effect of currency exchanges, Nike direct sales advanced 14% in the quarter.
Digital and direct sales are key because they represent major parts of the transformation Nike announced in 2017. And as we can see, the effort is bearing fruit. Nike also continues to be a favorite brand among consumers in North America and China.
Now, let's look at valuation. Nike's trading at 29 times forward earnings estimates. That's down from 48 late last year. At the same time, revenue continues to rise. This looks like a reasonable price considering Nike's strengths -- and the fact that current headwinds are temporary.
The case for Lululemon
Lululemon sells yoga-inspired clothing. And like Nike, the brand is much loved by shoppers. In fact, Lululemon gained more market share than any other brand across adult active apparel over the past two years, according to The NPD Group.
Lululemon reached two goals of its 2019 Power of Three growth plan early: Doubling revenue in digital and in its men's line. In fact, it actually tripled digital revenue from 2018 through last year. And it's now on its way to meeting the third goal of quadrupling international revenue.
Things are going so well that Lululemon set a new list of goals. As part of a five-year plan announced this spring, it will again double men's line revenues, double digital revenue, and quadruple international revenue. This will be from 2021 levels. If Lululemon is successful, it clearly could see a new era of share price gains.
So far, Lululemon has managed the current economic environment without too much effect on earnings. Like Nike, Lululemon has seen a decline in gross margin. It slipped 160 basis points to 56.5% in the most recent quarter. But Lululemon's inventory has remained at comfortable levels.
The retailer's quarterly revenue and income from operations increased in the double digits.
As for valuation, Lululemon, like Nike, has seen a decline. It's trading at about 29 times forward earnings estimates. That's compared to about 60 late last year. Considering Lululemon's management of the current environment and future prospects, this looks like a bargain.
So will it be Nike or Lululemon?
Both of these athletic giants are likely to be winners down the road. And they're both trading at interesting valuations today. They have solid revenue and earnings growth prospects thanks to the popularity of their brands.
That said, Lululemon is earlier in its growth story than Nike. It could see stronger revenue growth in the coming years as it builds out its business according to the latest growth plan. That means Lululemon may have more catalysts to drive the share price higher. And that's why, if I could only choose one of these consumer goods players to buy today, I would go for Lululemon.
