Nike (NYSE: NKE) and Lululemon (NASDAQ: LULU) are each growing sales at a solid clip these days. But investors haven’t rewarded the two stocks with similar capital gains in 2023. Lululemon shares are up significantly and beating the 18% rally in the S&P 500 through early September, while Nike is currently stuck in negative territory.
That performance gap can be explained by a tough selling environment in the footwear industry right now. But this challenge could lay the foundation for better returns for investors buying Nike today. With that prospect in mind, here’s a look at the two investments to see which one is the better growth stock for your portfolio.
Nike’s sales gains are being overshadowed by Lululemon’s expansion rate through mid-2023. The footwear giant’s revenue was up 16% in the most recent quarter after adjusting for currency-exchange rate shifts. Lululemon’s growth clocked in at a meatier 20%.
The retailers are both seeing bigger contributions from their international divisions today as the U.S. market slows. Yet that factor favors Lululemon, which is less established in places like China.
Management is aiming to quadruple international revenue in the five years ended in 2026 and the Q2 spike of 52% suggests that this growth is possible. It’s no surprise, then, that investors expect the athleisure specialist to outpace Nike this year with sales gains of about 18%, compared to Nike’s 5% uptick.
Lululemon also has the upper hand on profits today. Gross profit margin is expanding this year, rising 2 percentage points in the most recent quarter to 59% of sales. Nike’s comparable figure fell 1 percentage point to 44% of sales, mainly thanks to aggressive price cuts in the footwear industry.
LULU Gross Profit Margin data by YCharts.
The good news for Nike shareholders is that the company has made progress in balancing supply with demand over the last few quarters. As a result, it’s in a much better inventory position than peers such as Foot Locker.
That’s why management is predicting a profitability rebound in the year ahead. Still, investors can already see strong earnings growth at Lululemon, and its operating profit margin is over 20% of sales, compared to Nike’s 12% rate.
As you might expect, Nike’s stock is available at a significant discount to Lululemon’s. Investors are paying 3x sales for Nike, compared to Lululemon’s price-to-sales ratio of 6. The same trend holds for price-to-earnings ratios. Nike is valued at about 32x earnings, and Lululemon is trading for over 50x earnings.
That steep valuation might limit the returns an investor can expect from buying Lululemon today, yet the yoga apparel specialist still seems like the more attractive growth stock. Management has multiple avenues to attack as they expand their selling footprint into 2024 and beyond, including entry into new demographics like menswear and new product categories like footwear. Earnings seem likely to grow at a faster pace, too, thanks to a steady stream of innovative product releases.
Both companies should be setting annual sales and profit records in a few years, but Lululemon has a better shot at market-thumping growth from here.
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Demitri Kalogeropoulos has positions in Nike. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends Foot Locker and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
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