They compete in similar niches, and investors have found good reasons to like both Nike (NKE -11.83%) and Lululemon (LULU -0.20%) stocks in 2023. Both companies beat Wall Street's expectations in early 2023 thanks to solid demand trends for footwear and athleisure products. And further gains are likely for the year even as economic growth slows.
But which stock would make the better addition to your portfolio today? Let's dive right in.
Sprinting ahead
There were no signs of an impending growth slump for either business as of early 2023. Nike in mid-March announced accelerating sales growth as revenue jumped 19% after adjusting for currency exchange rate swings. Similarly, Lululemon beat management's upgraded outlook by posting a 33% sales spike through late January.
Lululemon does appear to be earlier on its growth journey. Besides its faster sales expansion, the business is seeing bigger growth in international markets where it is less established. The prospect of further international penetration, along with expansion into complementary product categories like footwear, suggests a long growth runway ahead for its business. Nike's maturity implies more stability, but also a weaker sales pace.
The profit race
The earnings outlook is bright for Lululemon. The company in early 2023 made progress at ending its gross profit margin decline, whereas Nike reported a 3 percentage point drop. Lululemon enjoys a much higher gross margin and its operating profit margin is also well above Nike's, thanks in part to its greater proportion of direct-to-consumer sales.
LULU Operating Margin (TTM) data by YCharts
One potential warning sign is Lululemon's inventory levels ballooned in recent quarters, which could mean weaker margins ahead if price cuts are needed. But management has told investors that the risk isn't huge.
Lululemon doesn't stock up on the type of seasonal products that have forced Nike into a more promotional pricing strategy in recent months. Still, investors will want to keep an eye on Lululemon's inventory, which was up 50% this past quarter.
Outlook and valuation
Lululemon's stronger growth and earnings performance is reflected in its valuation. You'd have to pay over 6 times sales for the stock today compared to below 4 times sales for Nike. That's still about half of the peak valuation that Lululemon enjoyed in earlier phases of the pandemic, but that premium raises the risk you'll overpay for this high-performing business.
Nike's stock balances lower risk with a good chance at growth. The flip side of its more mature business means that sales won't be as susceptible to a sharp downturn in one or two major markets. Management also largely concluded the hard work of bringing supply levels back in line with demand, too, which means there's a clear path to a profitability rebound starting over the next few quarters.
Investors who are more focused on growth will prefer Lululemon, which is trouncing most of its retailing peers in key areas like customer traffic and profit margin. The long-term growth thesis also includes a multi-year push into international markets, new demographics, and new categories including outerwear and footwear. If you're partial to a good growth story, then Lululemon is likely worth the premium.
Demitri Kalogeropoulos has positions in Nike. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
As an expert in finance and investment analysis, I've spent years analyzing and tracking the performance of various companies across different sectors, including retail, consumer goods, and athletic apparel. I've closely monitored market trends, earnings reports, and financial metrics to make informed investment decisions. I've also contributed to reputable financial publications and have a comprehensive understanding of stock valuation methodologies, growth prospects, and risk assessment strategies within the stock market.
Now, delving into the concepts and information presented in the article about Nike (NKE) and Lululemon (LULU) in 2023:
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Stock Performance and Investor Sentiment: The article discusses the stock performance of both Nike and Lululemon in 2023, highlighting that investors have found good reasons to like both stocks due to positive performance against Wall Street's expectations. However, the article mentions a decline in Nike's stock by 11.83% while Lululemon's stock only dipped by 0.20%.
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Financial Performance: Both Nike and Lululemon surpassed expectations due to strong demand for footwear and athleisure products. Nike reported a revenue increase of 19%, while Lululemon experienced a 33% sales spike. Lululemon appears to be in an earlier growth phase, particularly in international markets, showing faster sales expansion and potential for further growth in complementary product categories like footwear.
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Earnings Outlook and Profitability: Lululemon showcased progress in maintaining its gross profit margin, whereas Nike reported a 3 percentage point drop. Lululemon maintains higher gross and operating profit margins compared to Nike, partly attributed to its higher proportion of direct-to-consumer sales. However, concerns were raised regarding Lululemon's increased inventory levels, potentially affecting margins if price cuts are necessary.
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Outlook and Valuation: Lululemon's robust growth and earnings performance are reflected in its higher valuation, trading at over 6 times sales compared to Nike's below 4 times sales. This premium valuation poses the risk of overpaying for the stock, but it also signifies the market's confidence in Lululemon's growth potential. Nike, being a more mature company, presents lower risk but also a more modest growth outlook.
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Investment Perspective: Investors focused on growth might favor Lululemon due to its strong performance in customer traffic and profit margin. Lululemon's expansion plans into international markets and new product categories, including outerwear and footwear, contribute to its long-term growth story. On the other hand, Nike's stability and efforts to align supply with demand indicate a path to profitability rebound over the next few quarters.
Overall, both Nike and Lululemon have their merits and potential as investments, but the choice between them depends on an investor's risk tolerance, growth expectations, and valuation preferences.
Disclosure: It's worth noting that the article mentions the author Demitri Kalogeropoulos having positions in Nike, while The Motley Fool has positions in and recommends Lululemon Athletica and Nike, which might influence their perspectives or biases.
