They compete in similar niches, and investors have found good reasons to like both Nike (NKE 0.19%) and Lululemon (LULU 1.31%) stocks in 2023. Both companies beat Wall Street's expectations in early 2023 thanks to solid demand trends for footwear and athleisure products. And further gains are likely for the year even as economic growth slows.
But which stock would make the better addition to your portfolio today? Let's dive right in.
Sprinting ahead
There were no signs of an impending growth slump for either business as of early 2023. Nike in mid-March announced accelerating sales growth as revenue jumped 19% after adjusting for currency exchange rate swings. Similarly, Lululemon beat management's upgraded outlook by posting a 33% sales spike through late January.
Lululemon does appear to be earlier on its growth journey. Besides its faster sales expansion, the business is seeing bigger growth in international markets where it is less established. The prospect of further international penetration, along with expansion into complementary product categories like footwear, suggests a long growth runway ahead for its business. Nike's maturity implies more stability, but also a weaker sales pace.
The profit race
The earnings outlook is bright for Lululemon. The company in early 2023 made progress at ending its gross profit margin decline, whereas Nike reported a 3 percentage point drop. Lululemon enjoys a much higher gross margin and its operating profit margin is also well above Nike's, thanks in part to its greater proportion of direct-to-consumer sales.
LULU Operating Margin (TTM) data by YCharts
One potential warning sign is Lululemon's inventory levels ballooned in recent quarters, which could mean weaker margins ahead if price cuts are needed. But management has told investors that the risk isn't huge.
Lululemon doesn't stock up on the type of seasonal products that have forced Nike into a more promotional pricing strategy in recent months. Still, investors will want to keep an eye on Lululemon's inventory, which was up 50% this past quarter.
Outlook and valuation
Lululemon's stronger growth and earnings performance is reflected in its valuation. You'd have to pay over 6 times sales for the stock today compared to below 4 times sales for Nike. That's still about half of the peak valuation that Lululemon enjoyed in earlier phases of the pandemic, but that premium raises the risk you'll overpay for this high-performing business.
Nike's stock balances lower risk with a good chance at growth. The flip side of its more mature business means that sales won't be as susceptible to a sharp downturn in one or two major markets. Management also largely concluded the hard work of bringing supply levels back in line with demand, too, which means there's a clear path to a profitability rebound starting over the next few quarters.
Investors who are more focused on growth will prefer Lululemon, which is trouncing most of its retailing peers in key areas like customer traffic and profit margin. The long-term growth thesis also includes a multi-year push into international markets, new demographics, and new categories including outerwear and footwear. If you're partial to a good growth story, then Lululemon is likely worth the premium.
