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Better Buy: Nike vs. Lululemon

When it comes to size, Nike (NYSE: NKE) is second to none in the global sportswear market. The home of The Swoosh recorded $37.4 billion in sales during its last full fiscal year, and before the pandemic, it was still growing the top line at a healthy clip. The company's products are known all over the world, but because competition is always fierce in this industry, Nike can't afford to rest on its laurels.

lululemon athletica (NASDAQ: LULU) is the younger, fast-growing player, with revenue that increased 10.6% in the most recent fiscal year. Even more impressively, the business has registered fantastic growth over the past decade and doesn't show any signs of letting up.

For investors looking to gain exposure to the athletic apparel market, read on to find out which of these stocks is the better buy.

Image source: Getty Images.

Nike is doing well

Nike's results in the most recent quarter didn't please investors and the stock price dropped 10% in the week following the announcement. Sales figures disappointed due to supply chain issues driven by shipping container shortages and U.S. port congestion, which hurt inventory levels. This led to North American sales falling 10% in the quarter, not a good sign for the company's largest market.

There were some bright spots, however. The Greater China segment expanded 51%, and the company's overall digital sales jumped 59%. Sure, the supply chain problems are not what investors want to see for a business that is still recovering from the coronavirus pandemic. But it's good news that Nike can rely on its direct-to-consumer and international strength to alleviate weakness here in the U.S.

In the apparel and footwear market, the brand name is everything. And Nike still leads in this regard. "Nike's brand momentum is as strong as ever and we are driving focused growth against our largest opportunities," said Matt Friend, Executive Vice President and CFO.

The business is bolstering its brand with its suite of digital apps, most notably SNKRS, which is seeing four times the engagement in monthly active users compared to last year. This leads to more purchasing and a deeper connection with the consumer, and it puts Nike in a powerful position in an increasingly tech-driven world.

For those investors seeking income, Nike has raised its dividend for 19 straight years. Furthermore, share repurchases are expected to continue next quarter following a suspension to preserve liquidity during the pandemic.

Image source: Getty Images.

But Lululemon is performing better

Overall revenue growth of 24% and comparable sales growth of 21% were key highlights of Lululemon's most recent quarter. The company's direct-to-consumer business puts Nike's to shame. It soared 94% year over year in Q4 2020 and now represents more than half of total sales.

Lululemon's business has come roaring back since last spring, and it's exhibiting solid growth in both women's (its best-performing category) and men's (a huge opportunity). And while the company is growing fast, what's remarkable is that its gross profit and operating margins are higher than Nike's. So, investors can get a wonderful growth story without sacrificing profitability.

Mirror, which Lululemon recently acquired, gives the company exposure to the booming at-home fitness industry. While sales for Mirror are expected to rise 50% to 65% to reach $250 million to $275 million in fiscal 2021, they'll still only be a small fraction of the approximately $5.6 billion in total revenue Lululemon expects to generate for the full year.

Lululemon will also be opening more company stores this year. Management sees 40 to 50 openings globally this year. Guest favorites such as curbside pick-up, virtual waitlist, and appointment shopping will certainly be utilized to enhance the consumer experience.

What about valuation?

I always like to address the qualitative merits of potential investments before looking at valuation. For long-term investors, focusing on quality can't be avoided. When a stock meets the criteria for being a solid business, only then should valuation become a factor.

With that being said, between these two stocks, Lululemon to me is the better business to own right now. It's built a global brand in a fiercely competitive space, has better financial metrics than Nike, and it is still growing quickly with a long runway in front of it. Additionally, while Nike battles with inventory and supply chain problems, Lululemon is humming right along.

At 50 times forward earnings (compared to 43 for Nike), it's worth paying a premium for.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.


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