When it comes to sports apparel, Nike(NYSE: NKE) has long been the top dog. However, challengers are coming for the top spot, including athletic leisure and apparel company Lululemon(NASDAQ: LULU).
Both stocks have been very lucrative to own over the long term. Unfortunately, they're both in a bit of a rut, trading within shouting distance of their 52-week lows.
I think these dips are great buying opportunities for long-term investors. But which one is more likely to outperform the market from its current price?
The answer lies below.
Why are these companies down?
Of course, the first step in determining which stock to buy is to understand why shares are down in the first place. The broader trend is that revenue growth for both companies has slowed dramatically since 2021, when consumer spending was much stronger due to pandemic stimulus checks. Lululemon's revenue growth has been and remains superior to Nike's.
NKE Revenue (Quarterly YoY Growth) data by YCharts
Both companies recently reported earnings and beat analyst estimates on revenue and earnings per share. But the devil is in the details, where each company has struggled.
Nike admitted in its earnings call that its execution hasn't been crisp. The company fixated on direct-to-consumer sales to the point that it neglected its traditional wholesale channels. Momentum slowed in the quarter; shoe sales were down 5% quarter-over-quarter, and apparel sales were down 13%.
Lululemon issued Q1 guidance that disappointed Wall Street, blaming a soft U.S. consumer for a slow start to this year. Despite that commentary, sales per square foot in U.S. stores are still among the highest in the company, so management remains optimistic about long-term trends.
Which stock is the better bargain today?
Wall Street occasionally flips which stock to assign the higher valuation to. For most of the past year, Lululemon has enjoyed a premium to Nike. Today that gap is down to a small margin. Both companies now trade between 25 (Nike) and 27 times earnings (Lululemon). I think these are close enough to call them negligible. So investors must look at growth to understand the value between them better.
NKE Normalized Diluted EPS (TTM) data by YCharts
Looking at the past, it's not particularly close. Lululemon has grown its earnings far more over the past five years than Nike. Additionally, analysts have been steadfast in their future expectations. Lululemon is expected to grow faster than Nike; analysts call for 15% annualized earnings growth versus 11% for Nike.
Which stock is the better buy?
While Nike is the cheaper stock, Lululemon's superior earnings growth arguably makes it the better value. This is backed up by the PEG ratio, which compares the stock's valuation to the company's earnings growth. The lower the ratio, the better.
Nike's PEG ratio is currently 2.2, while Lululemon's is 1.8.
Management's admission that Nike isn't executing to its full potential wraps up this comparison (though I'm happy to see the accountability). I'm sure Nike will figure this out over time, but given Lululemon's more attractive growth and valuation, it's just another knock against Nike.
Investors are better off buying and holding Lululemon at today's prices.
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Justin Pope has no position in any of the stocks mentioned. 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.
