Nike (NKE 0.99%) has disappointed investors in recent times. In the last five years, shares of the activewear giant have climbed just 22%. Both the S&P 500 and Nasdaq Composite fared significantly better than this measly return.
Of course, Nike is dealing with some issues that can't be ignored. And this situation might mean that it's best to look elsewhere to gain exposure to the apparel industry. In fact, a smart idea now would be to consider Lululemon Athletica (LULU 1.84%). Here's why.
Nike struggles
NYSE: NKE
Key Data Points
It's hard to deny Nike's impressive long-term track record of increasing revenue and earnings. The business has one of the most powerful and widely recognized brands on the face of the planet. And this has kept it relevant, even though the fashion industry is characterized by changing tastes and preferences.
But more recently, macroeconomic headwinds are hurting Nike. The company reported 1% revenue growth in the latest fiscal quarter (Q2 2024 ended Nov. 30), with management forecasting a 1% gain for the full fiscal year. This marks a major slowdown from what shareholders are probably used to.
In what is supposed to be its fastest-growing region, Greater China, the situation isn't favorable. Revenue was up just 4% in this market last quarter, coming in at $1.9 billion. Even more alarming, that figure was in line with the total in the same period four years ago.
"We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment," Nike CFO Matt Friend said on the Q2 2024 earnings call.
Lululemon thrives
NASDAQ: LULU
Key Data Points
Looking at Nike's latest challenges makes Lululemon's performance all the more impressive. The Canada-based enterprise started as a yoga apparel maker targeting women, but it has now become a full activewear and lifestyle company for everyone.
Lululemon hasn't been fazed at all by the headwinds in the past few years that derailed Nike. The coronavirus pandemic, supply chain issues, inflationary pressures, higher interest rates, and economic uncertainty are what all businesses dealt with in recent times. But after sales dipped 17% in the first quarter of fiscal 2020, Lululemon reported double-digit revenue growth in the following 14 consecutive quarters, a streak that's still going strong.
Compared to Nike, Lululemon carries a premium standing in the industry. This is exemplified by its excellent profitability, with a Q3 2023 gross margin of 57% and operating margin of 15.3%. Both figures are better than Nike's margins.
As we look ahead, Lululemon has incredible growth prospects. Management's goal is to achieve revenue of $12.5 billion in fiscal 2026, double 2021's total. It looks like they are ahead of schedule. Key factors of this goal are to double men's, double digital, and quadruple international sales. This shouldn't be a problem.
That's because men's sales were up 15% in the latest quarter. And Lululemon generated 41% of its business via the digital channel in Q3, providing a high-margin revenue source.
And when it comes to international ambitions, there is a ton of opportunity, particularly in China, where Nike has been struggling. Only 12% of Lululemon's sales are derived in the Asian nation, so it makes sense that the executive team is focused on broadening the horizons.
"Our new store openings in 2023 will include approximately 35 stores in our international markets, with the majority of these planned for China," CFO Meghan Frank highlighted on the Q3 2023 earnings call.
In the last five years, shares of Lululemon have soared 210%, crushing Nike's gain during the same time. This meaningful outperformance hasn't made the former that much more expensive of a business to buy. Lululemon currently trades at a forward price-to-earnings ratio of 32.7, in the same ballpark as Nike's multiple of 29.2. This is despite Lululemon posting better growth and profitability.
The choice for investors couldn't be clearer: forget Nike and focus on Lululemon.
