Investors pushed shares of Nike (NYSE:NKE) higher by more than 11% last week after the athletic apparel and accessories maker reported better than expected first-quarter earnings results. Nike's revenue climbed 15% to $8 billion in the three month period ended Aug. 31. And that wasn't the only number that impressed Wall Street. Diluted earnings per share of $1.09 (an increase of 27% over the year-ago period) and a 14% spike in future orders were some of the other highlights from the strong quarter. Shares of Nike hit an all-time high of nearly $90 a pop on Friday as a result. However, given Nike's impressive run and the fact that it's now trading at record levels, investors might want to look elsewhere for the next big winner.
Nike's under-rated rival
lululemon athletica (NASDAQ:LULU) is one name that stands out today. Unlike Nike, Lululemon's stock is trading near its 52-week low, with shares having fallen more than 41% in the past year. That compares to a 17% increase in Nike's stock value over the same period. Nearly everyone is betting against the retailer these days, which is why I think there is significant upside for the stock now that its turnaround efforts are starting to take shape.
Lululemon's stock has been under pressure most of this year following a series of mishaps including product recalls and a management shuffle. However, fresh leadership at the top and the company's entrance into new product categories like casual wear should fuel sales growth going forward.
For starters, Laurent Potdevin stepped in as Lululemon's new chief executive officer earlier this year and investors are already beginning to see a transformation in the retailer's operating performance as a result. Under Mr. Potdevin's direction, the brand has refreshed its product cycle and is bringing items to market faster than ever before. In a bid to expand beyond its niche market of yoga-inspired athletic gear, the retailer is also making a big bet on "everyday wear."
The company's recently launched "lululemon & Go" apparel line is already flying off the shelves. This could significantly broaden Lululemon's customer base in the long run because its "& Go" line is meant to be worn outside of the gym. Moreover, the yoga apparel maker's latest strategy is to get customers to wear its gear not only to the gym, but also in the work place or at a night on the town with friends. In its latest ad campaign for the products Lululemon quips, "Perfect day-to-night versatility ... we just swap our sneakers for heels."
The initial response for these new products is overwhelmingly positive. In fact, certain pieces from Lululemon's fall line such as its Avenue Blouse, Sweet Jorts, and Get It On Pant, sold out online within weeks of going on sale. As a result, Lululemon's revenue in its latest quarter jumped 13% to $390 million. While that is a drop in the bucket compared to Nike's billion-dollar sales figure, it proves there is growing demand for Lulu's products. Not to mention, Lululemon has only just begun tapping into the lucrative men's category. Comparable sales of men's clothing increased 5% in the recent quarter, and that number should continue to improve as Lululemon rolls out more masculine designs for men in the quarters to come.
The ultimate take away here is that most of the market underestimates Lululemon today. Just look at how many investors are currently betting against the retailer -- more than 24% of Lululemon's shares are sold short, compared to less than 1% for shares of Nike. Nevertheless, this high short interest could actually work in our favor because any good news out of the company would likely send the stock soaring as short sellers rush to cover their positions.
Low expectations, a winning turnaround plan, and high short interest in the stock, create an opportunity for investors to get in ahead of what I suspect will be a very rewarding comeback story. For these reasons I'd rather buy shares of Lululemon on its recent pullback than Nike at all-time highs.
Tamara Rutter owns shares of Lululemon Athletica. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.