Nike (NKE +1.90%) is a dominant global footwear brand, with $33 billion in annual shoe sales. But weak consumer spending trends are revealing holes in Nike's business.
In the most recent quarter, Nike's footwear sales were down 6% year over year, which led a slight decline in overall sales. The soft demand trends have sent Nike stock down 60% from its all-time high.
Most Wall Street analysts still rate Nike shares a buy, as the stock trades at its lowest price-to-earnings valuation in years, but over the long term, companies that grow their revenue and earnings at the highest rates will usually outperform slower-growing companies, regardless of their valuation. This is why a stock like Amazon returned 4,800% over the last 24 years, compared to just 375% from slower-growing Walmart, despite Amazon trading at a higher price-to-earnings and price-to-sales multiple over that time frame.
Before deciding to buy Nike shares, let's look at three companies that could deliver much better returns for investors over the long term.
1. Shopify
Shopify (SHOP 2.08%) is a leading e-commerce company that provides all the tools needed for a business to set up an online storefront and receive payments. It is helping millions of merchants around the world to grow their businesses, but there is still enough runway in the e-commerce market that spells enormous return potential for investors.
NASDAQ: SHOP
Key Data Points
E-commerce is a multitrillion-dollar market and still growing. Online retail spending only makes up 15% of retail sales in the U.S., and Shopify continues to grow like it's got a high ceiling. Revenue increased by 23% year over year in the first quarter. However, excluding the sale of its logistics business, revenue would have grown even faster at 29% over the year-ago period.
Shopify is attracting a wider range of merchants, including large companies like Coach and Overstock.com. It is truly becoming a must-have platform for any business that is not selling through Amazon. Shopify has introduced more than 400 new features and improvements over the last two years, including its new artificial intelligence (AI)-powered assistant Shopify Magic. It also continues to expand beyond online sales to offer businesses point-of-sale solutions in physical stores.
Shopify should grow much faster than Nike over the several years. Over the last decade, Nike grew earnings at an annual rate of 10%, but Wall Street analysts expect Shopify's annualized earnings growth to clock in at 43% going forward, which is more than enough for Shopify shares to sprint past Nike in the coming years.
2. Lululemon Athletica
Like Nike, Lululemon Athletica (LULU +1.48%) also posted weaker financial results to start the year, which sent its share price tumbling. Consumers are clearly cutting back on apparel right now, but it's a great sign for Lululemon that it's still growing much faster than Nike in a soft-demand environment.
NASDAQ: LULU
Key Data Points
Lululemon's revenue grew 10% over the year-ago quarter. Management credits this double-digit growth to consistent product innovation and the company's grassroots marketing strategy of using local events to spread brand awareness.
Lululemon's worldwide potential is most evident in China. While Nike's China business grew 3% year over year in its most recent quarter, or 7% when excluding currency changes, Lululemon's China business grew by an impressive 52% in its most recent quarter.
Analysts expect Lululemon's earnings to grow at an annualized rate of 11% over the next several years, which is higher than the 6.7% earnings growth estimate for Nike. Lululemon shares should continue to outpace the return of Nike, as it has already over the last several years.
3. On Holding
On Holding (ONON +4.25%) is another rising athleticwear brand that is demonstrating the potential to deliver superior returns. On is known for performance shoes, which made up 95% of its sales last year. This puts it in direct competition with Nike, which makes On's robust growth even more impressive.
NYSE: ONON
Key Data Points
On sells through wholesale and direct-to-consumer (DTC) channels. The latter is where the company is seeing tremendous momentum, with DTC sales up 49% year over year in the first quarter excluding currency changes. This brings the DTC business up to 37% of On's total sales.
The company still has a lot of opportunity to build brand awareness. Management is looking to build more connections with customers around the world using its direct-to-consumer channel and upcoming product launches. When all is said and done, this emerging shoe brand could be looking at many years of double-digit growth -- similar to what Nike experienced in its early years.
Analysts forecast the company's earnings to grow at an annualized rate of 33%, in line with management's sales growth guidance this year. Its robust growth has fueled the stock up 21% over the last 12 months, and it could hit more new highs over the next few years and beyond.
