Faced with economic headwinds like high inflation and a potentially weakening job market, consumers have been wary. With people pulling back their spending, consumer goods companies have been feeling the effects. That's reflected in the S&P 500 consumer discretionary sector's 4.8% return over the past year through Jan. 22. By contrast, the S&P 500 returned 15.1% over this period.
But that could present a buying opportunity for long-term investors. Looking at two well-known companies, Nike (NKE 0.85%) and TJX Companies (TJX 0.43%), does one offer better return potential to patient investors? To make that determination, you have to better understand each company's fundamentals. Let's investigate.
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Nike
Nike once seemed like an unstoppable force, with many sports stars endorsing its footwear, apparel, and equipment. Most of its sales (about 65% in the first half of the fiscal year) come from selling footwear, and it commanded a large market share for decades.
But sales have been slumping for some time. That's due to several reasons, like more intense competition, including from Deckers' Hoka and On Holding; a lack of innovative products to drive demand; and a decision to focus on selling directly to consumers via its own stores and website. This left out its important retail partners (i.e., its wholesale business). In late 2024, management pledged to rebuild these relationships.
But Nike's sales growth has remained lackluster. The company's fiscal third-quarter sales were flat after removing foreign-currency translation effects. Wholesale revenue did grow 8%, but direct revenue dropped 9%. The results covered the three months ended Nov. 30.
NYSE: NKE
Key Data Points
TJX Companies
TJX Companies operates an off-price retail business under well-known brands like TJ Maxx, Marshalls, and HomeGoods. The company buys merchandise, which includes apparel, jewelry, beauty products, and home goods like furnishings, at attractive prices. It can execute this strategy, since manufacturers may have too much inventory of certain items.
That allows TJX's brands to offer discounted prices to customers. It's particularly effective during challenging economic times, when it can find a greater selection of goods at good prices.
With signs of labor weakness and consumers wary about high prices, TJX has benefited. Fiscal third-quarter same-store sales (comps) increased 5% for the period ended on Nov. 1. It posted positive comps across all of its businesses.
NYSE: TJX
Key Data Points
Which is the better buy?
Nike's shares haven't done well. In the past year through Jan. 22, the stock returned -9.5%. Meanwhile, the S&P 500 had a total return of 15.1%. Nonetheless, Nike's valuation has gotten richer. The shares trade at a price-to-earnings (P/E) ratio of 38 compared to 24 a year ago. I'd pass on Nike's stock. While Nike could turn around its business and accelerate sales growth, it faces major challenges, including intense competition.
During this time, TJX's stock rewarded shareholders with a 26.7% return. The shares' P/E ratio expanded from 29 to 34. While that's higher than the S&P 500's 31 P/E multiple, given its sales growth, I think the more expensive valuation is warranted, due to its execution and operational performance. I'd choose TJX Companies for its reasonable valuation compared to the market, impressive sales growth, and defensive characteristics against a recession.
