The retail industry is fiercely competitive today. Yet, few companies understand this as well as rival sports apparel giants Lululemon Athletica (NASDAQ: LULU) and Under Armour (NYSE: UA). Helped by a consumer shift from jeans to what's being called "athleisure wear," athletic apparel retailers are now competing in an increasingly lucrative industry. In fact, active wear is a $35 billion opportunity today, accounting for as much as 17% of the overall apparel market, according to Barron's. With Lululemon and Under Armour facing off for a bigger percentage of this pie, let's take a closer look at which stock will better serve investors in the year ahead.
Finding the perfect fit
Both stocks are currently trading around the high end of their respective 52-week ranges. However, from a valuation perspective, Under Armour is more expensive at its current levels, though only slightly. Shares of Under Armour have one of the highest price-to-earnings-growth or PEG ratios in the industry at 3.39 today. This makes Under Armour appear highly valued, as it is markedly above both Lululemon's PEG value of 2.35 and the industry median PEG of 1.94.
It is also worth mentioning that Lululemon currently converts a larger portion of income to profits when compared to Under Armour. The yoga-inspired apparel maker, for example, boasts an operating margin of 21.74%. That compares to an 11% operating margin for Under Armour. Nevertheless, this is hardly reason enough to favor Lulu over Under Armour in 2015.
In fact, if we look beyond traditional valuation metrics and instead focus on the underlying fundamentals of their businesses, Under Armour seems better positioned to capitalize on market trends like "athleisure wear" for many years to come.
You see, Lululemon is still working to right its ship after a series of missteps that subsequently cut the stock's value in half over the past couple years. The company has finally rid itself of its controversial founder, Chip Wilson. However, it faces more challenges ahead as its new chief executive, Laurent Potdevin, settles in and attempts to rebuild the brand that once enjoyed a cult-like following.
With new management at the top, Lululemon is in the process of adding new product categories such as swimwear, streamlining its supply chain, and expanding into new overseas markets including the Middle East. These are all encouraging developments for the company and its new leadership team is more than capable of successfully executing them. However, profits may be crimped in the near-term as the company invests in new product categories and store openings. Ultimately, this is a transitional period for Lululemon, whereas Under Armour is better established as a market leader today both domestically and abroad.
Competitive advantages abound
Women's athletic apparel now makes up a meaty 30% of Under Armour's $3 billion in annual sales. Challenging Lululemon's women-centric appeal, Under Armour recently launched high profile campaigns with the likes of supermodel Gisele Bundchen and top female athletes. Unlike Lululemon, Under Armour spends tens of millions of dollars each year on endorsement deals with celebrities and all-star athletes -- a strategy that has worked well for the company.
Under Armour's foray into digital technology is another differentiating factor between itself and Lululemon. The company recently acquired MyFitnessPal for $475 million. The company's connected fitness strategy should not only make consumers more loyal to the Under Armour brand, but will also enable the company to better understand its customers and create products and technologies down the road that better cater to their needs.
For these reasons, I believe investors are better off owning shares of Under Armour versus Lululemon today, despite the stock trading at a slightly richer valuation.