Investors have vastly different expectations for Nike (NKE 0.19%) and Lululemon Athletica (LULU 1.31%). While they compete in some of the same athletic apparel niches, one is growing sales at a robust pace and is boosting its profit margins at the same time. The other has seen shrinking demand even as price cuts pressure its earning power.
These differing growth paths have made Nike stock seem like an obvious deal compared to its faster-growing industry peer. However, price isn't the only factor worth considering when comparing these retailers. With that in mind, let's see which stock is really the better buy today.
Nike isn't growing
There's a lot of daylight between these two retailers when it comes to growth. Nike reported just a 1% year-over-year sales uptick in the most recent quarter while Lululemon achieved 19% gains.
Lots of factors went into that difference, but the biggest is Nike's exposure to a footwear industry that's struggling with too much supply. Retailing partners like Foot Locker are cutting prices in response and have been trimming their inventories. These moves leave Nike with few attractive options to reaccelerate growth.
That challenge is clear enough in Nike's short-term outlook that calls for even weaker sales trends over the next six months. Lululemon, in contrast, hiked its fiscal-year outlook in January, saying in a press release that sales will rise by as much as 15% in 2023.
Lululemon has the profits
Nike's weaker profit margin is another metric worth watching if you're thinking the stock is a no-brainer value. Sure, the management team is pivoting to a cost-cutting focus. But it will likely be several quarters before that strategic shift starts to really pay off. In the meantime, Lululemon is the clear winner today.
The yoga apparel specialist's gross profit margin is high and rising, touching 58% in the most recent quarter. Nike's margin is 13 percentage points lower, at just 45% last quarter.
These differences carry through to the companies' bottom lines. Lululemon converts 22% of its sales into operating profit compared to Nike's 12%. Combined with Nike's weaker growth rate, this profitability gap implies much slower annual earnings growth compared to its smaller peer.
Qualitative wins
An investor might still prefer Nike stock over Lululemon for factors like its large global sales footprint ($51 billion vs. $9 billion) and its cheaper valuation. These points reduce the risk that you'll dramatically overpay for Nike shares, especially given the pessimism around its business today.
Still, Lululemon is the stronger growth stock, and so it has the best chance at delivering market-thumping returns over the long term. Don't forget that Nike's rebound strategy could disappoint investors as well, just as it has in the past. That's a big reason Nike's stock has risen just 17% in the past five years compared to the wider market's 83% increase (and Lululemon's 221% rally).
Investors will get more data to judge Lululemon when the company announces its fourth-quarter results in late March. At least until then, though, the stock seems like a much better choice over Nike right now.
