Wall Street has put both Nike (NKE -0.11%) and Lululemon Athletica (LULU -0.70%) stocks on the discount shelf this year. The retailers are down 14% and 24% in 2024, respectively, even as the S&P 500 is up 9% through late March.
Both stocks will likely bounce back. Nike is the clear leader in the athletic footwear niche, after all, and Lululemon has a bright long-term outlook as it pushes into new geographies and product categories.
But one stock will be a better fit in most investors' growth-focused portfolios. Let's look at which one is the more attractive buy right now.
Still expanding
Investors were disappointed with both companies' late-March earnings updates, yet Nike's performance reflected deeper challenges in the footwear industry. Sales were flat at $12.4 billion, with essentially zero growth in its stores and online selling channel. There's no quick answer to these challenges, either, which are being driven by weaker demand trends and a desire by Nike's retailing partners to slash inventory levels.
That's why management recently announced a restructuring program aimed at cutting costs. "We are making the necessary adjustments to drive Nike's next chapter of growth," CEO John Donahoe said in a press release.
Lululemon's expansion rate is far stronger, with sales jumping 16% to $3.2 billion over the holiday-season quarter. Standout niches for the sports apparel specialist included the Chinese market (up 60%) and the e-commerce channel (up 17%). "We are pleased with our strong finish to the 2023 fiscal year," CEO Calvin McDonald told investors on March 21.
Pricing power
Lululemon compares favorably against Nike on its finances, too, despite its much smaller sales footprint and its relatively weaker market position. That's because Nike depends on its retailing partners to set prices, giving it less control over this key metric.
LULU Gross Profit Margin data by YCharts
You can see the difference reflected in gross profit margin, which for Lululemon improved by 2 percentage points to 59% of sales this past quarter. Nike's comparable figure is sitting at just 45% of sales today. Nike executives said they're seeing higher markdowns in some areas, which is a key reason why they reduced their short-term growth outlook.
Outlook and value
Lululemon expressed caution about the next few quarters, too, saying in a conference call with investors that demand trends are slumping in the core U.S. market. "We're navigating what has been a slower start to the year in this market," McDonald explained.
As a result, most Wall Street pros are looking for sales to rise by 13% this year following last year's 19% spike. Nike's revenue, in contrast, is likely to contract by 7%. As you might expect, you'll have to pay a big premium for Lululemon compared to Nike. Shares are priced at 5 times annual sales, while Nike costs about 2.8 times sales.
The good news is that both valuations have been roughly cut in half since their pandemic highs, reducing the risk that you'll overpay for these companies. Yet Lululemon seems easily worth the higher premium. Sure, growth this year won't be as high as what investors have been used to seeing from the company. But the retailer's broader expansion plans are on track, including its increasing influence outside of the U.S. and Canada along with the company's entry into new product categories like footwear.
Lululemon stock won't be as attractive if growth turns negative in the U.S. market, or if gross profit margin starts contracting under pricing pressures. Keep an eye on these metrics over the next few quarters for signs of bigger struggles. But for now, the business is giving investors some good reasons to like its stock following its recent pullback.
