In the last one-, three-, and five-year periods, Nike (NKE 1.27%) shares have underperformed the S&P 500. The disappointment has been more pronounced in just the last 12 months, a time when Nike's stock fell 21%, compared to the broader market's 19% gain.
Investors are souring on the leading apparel and footwear business. And there are good reasons for this pessimism. If you're thinking about adding Nike to your portfolio, it's best to think again.
Consider Lululemon (LULU 1.34%), an unstoppable stock, instead.
Nike's weaknesses
Nike's recent sales trends are concerning, and this could be a key reason why the stock is underperforming so much. In each of the last four fiscal quarters, revenue growth has decelerated on a year-over-year basis. In the most recent fiscal quarter (Q2 2024 ended Nov. 30), sales were up by just 1%.
And for the full fiscal year of 2024, management now expects revenue to rise by 1%, down from prior guidance of mid-single-digit growth. They continue to blame weak macroeconomic conditions that have impacted consumer spending, particularly in the most recent holiday shopping period, as well as a strong U.S. dollar that creates a headwind when recording revenue that's earned in international markets.
To its credit, Nike has better control over its inventory. And the leadership team is embarking on a major cost-cutting plan to reduce expenses by over $2 billion over the next three years. The positive effects might already be present, as the business saw its net income increase 19% last quarter.
Nonetheless, it's easy to see why investors would be discouraged right now. Nike is hoping to stabilize its operations in the near term.
Lululemon's strengths
NASDAQ: LULU
Key Data Points
In the past four years, a bunch of headwinds have derailed many companies. The list includes the COVID-19 pandemic, supply chain bottlenecks, inflationary pressures, rising interest rates, and the possibility of an upcoming recession. Yet Lululemon continues to hum along.
Lululemon has registered 13 straight quarters of more than 18% year-over-year sales growth, a truly impressive feat. These double-digit gains are certainly better than what Nike has been able to produce.
Even better, Lululemon is incredibly profitable. Because its products carry a more premium status than Nike's, Lululemon's gross margin of 57% last fiscal quarter is higher than its biggest competitor's. And this has been the case if we look back several years.
Moreover, Lululemon has a much larger growth runway in front of it. After the business achieved its financial goals announced in 2019 ahead of schedule, management introduced another outlook, known as the "Power of Three x2," where the primary objective is to double sales between fiscal 2021 and fiscal 2026. Key to this strategy is to bolster men's, international, and digital revenues.
Based on the executive team's track record of previously exceeding its long-term expectations, I'm confident the company can do the same this time around. And this could lead to strong returns for investors.
Something to remember
Despite the positive characteristics about Lululemon's business, especially when compared to Nike, there is one factor that might give investors pause: the valuation.
Shares have been a massive outperformer historically. And as of this writing, they trade at a forward price-to-earnings (P/E) ratio of 37.6. This is about 33% more expensive than Nike's forward P/E of 28.2.
However, based on what I've discussed, it's easy to find arguments supporting why Lululemon should trade at a premium valuation when compared to its bigger rival. Over the next five to 10 years, there's a high chance that Lululemon's revenue and earnings will continue to grow at a much faster clip than Nike, thus justifying the stock's valuation.
