There's no doubt that the apparel industry is incredibly competitive, with companies fighting for consumers' wallets with effective marketing tactics, product quality, and pricing. Making things difficult is the fact that tastes change, and for those businesses that want to live to fight another day, it's a constant challenge to remain on top.
Nike (NKE -2.08%) and Lululemon (LULU -1.72%) are two apparel companies that stand out from the crowd. Let's take a look at which stock is the better buy today.
1. The case for Nike
Investing in Nike appears to be a safe action to take for your portfolio. With trailing-12-month sales of $49.1 billion, Nike is a global leader in the apparel industry, operating successfully since its founding in 1964. This long history has helped Nike develop a resilient and powerful brand that is associated with a winning mentality.
According to Piper Sandler's latest Taking Stock With Teens survey, Nike was the clear favorite among the Gen-Z demographic when it came to favorite clothing and footwear brands. Boosting this image is the company's strategy of endorsing high-profile athletes, like LeBron James and Cristiano Ronaldo, to further bolster awareness.
Despite its huge size, Nike still has the chance to grow. The worldwide activewear market is estimated to be valued at $380 billion, giving the business just a 13% share (based on trailing-12-month revenue). This means there is a ton of opportunity to steal market share in the decade ahead by sticking to the same playbook of introducing in-demand products and implementing effective and inspirational marketing campaigns.
Management is optimistic, particularly thanks to Nike's superior digital infrastructure. The business counts 160 million active members across its entire ecosystem, which includes applications like Nike Training Club, Nike Running Club, and the SNKRS app. Driving deeper connections with consumers and making it easier for them to engage with the brand is what it's all about.
Buying Nike shares might not produce monumental returns, but the business can provide a solid foundation for anyone's portfolio. And this peace of mind is important given the worsening macro environment.
2. The case for Lululemon
In its most recent fiscal quarter (the third quarter of 2022, ended Oct. 30), Lululemon was able to increase revenue 28% and net income 36% versus the prior-year period. Direct-to-consumer sales were up 31%, representing 41% of overall revenue. And profitability was fantastic, as the gross margin of 55.9% and operating margin of 19% clearly demonstrate.
While Lululemon isn't near the size of Nike today, it does have some key advantages that have contributed to its spectacular success. Lululemon has focused primarily on a community-driven, grassroots marketing strategy that relies on ambassadors to inform product and store decisions, teach workout classes, and host events. The result is a stronger and more personal connection with potential customers.
Additionally, it's evident that Lululemon's attention is solely on the premium, higher end of the apparel market. Being a pioneer of the "athleisure" movement has attracted a new customer base that wasn't fully addressed by traditional players, including Nike. And Lululemon's competitive positioning benefited it greatly during the depths of the coronavirus pandemic, as people sought out more comfortable quality attire. Having customers who are willing and able to pay up for its merchandise somewhat insulates Lululemon should a recession happen.
Looking ahead, Lululemon still possesses tremendous growth potential. The management team sees annual revenue doubling between fiscal 2021 and fiscal 2026 to $12.5 billion. Penetrating international markets, as well as boosting the men's segment, and introducing more footwear options are all important low-hanging opportunities. As Lululemon increases sales in the years ahead, it will continue to leverage its fixed costs, leading to greater profits.
There's a clear winner
Based on what I've outlined above, I go with Lululemon as the better stock to buy right now. Lululemon has exhibited remarkable growth on both the top and bottom lines, while Nike has struggled with choppy financial results in recent quarters. This is a clear indicator of Lululemon's superior performance at a time when most other companies are having difficulties.
And as of Jan. 3, Nike's price-to-earnings (P/E) ratio was 33, while Lululemon's was 35. If I'm being asked to pay essentially the same valuation for a business, I will choose the one that has much better growth prospects and profitability. To Nike's credit, it has established itself as the dominant brand in the industry, and it's not going anywhere. Also, because Lululemon hasn't been around quite as long, its brand's durability is certainly something that has yet to be proven over long periods of time.
But I'm happy to take on that bet. I think Lululemon will produce a better return for investors over the next five years.
