Despite a higher valuation, we believe Lululemon stock (NASDAQ: LULU) is currently a better choice compared to Nike stock (NYSE: NKE), given its better revenue growth and sales. margins. Both companies have taken advantage of stay-at-home orders, with customers prioritizing athletic wear and comfortable clothing to spend more time at home during the pandemic. While store closings and costs weighed on both companies during the initial 2020 closings, they still benefited from digital sales growth. But how is Lululemon’s stock rated against Nike’s stock? Lululemon is trading at around 10 times the trailing revenue, compared to 6 times for Nike. While Lululemon’s stock looks overvalued compared to Nike’s stock, given the noticeable mismatch of their current multiple P / Ss, we still think this is a better choice between the two. companies. This is based on a comparison of the revenue growth and operating margins of the two companies over the past few years. Lululemon’s premium valuation shouldn’t stop you from investing in this high-performing stock, which has demonstrated revenue growth while increasing profit margins over the past few years. But there is more to this comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Lululemon vs. Nike: Industry peers: which stock is a better bet? has more details on this. Parts of the analysis are summarized below.
1. Lululemon’s revenue growth has been stronger
While we recognize that Nike generates 9 times more revenue than Lululemon, the latter’s revenue growth has been higher over the past twelve months – Lululemon’s revenue increased 43% compared to Nike’s 24%. To add to that, Lululemon’s revenue has also grown at a CAGR of 18% over the past three years, well above the 7% figure for Nike. Looking ahead, we estimate that Lululemon’s revenue will experience strong growth of 67% over the next two years, compared to 10% growth for Nike. Our Lululemon Revenue and Nike Revenue dashboards provide more information on business revenue.
Lululemon’s revenue grew 61% year-on-year to $ 1.5 billion in its most recent quarter, while Nike’s revenue grew 16% to $ 12.2 billion in the last quarter. the same period. While issues in the global supply chain have taken a heavy toll on apparel companies heading into the major holiday shopping season, Lululemon appears to be in a better position than Nike. That said, Nike lowered its annual forecast due to supply chain issues that plagued its factories in Vietnam and Indonesia. It should be noted that almost 51% of Nike shoes and 30% of its clothes are made in Vietnam. In addition, rail and port congestion has lengthened the arrival times of goods in North America and EMEA regions for Nike. On the other hand, Lululemon has provided strong guidance for the remainder of fiscal 2021 – with sales expected to grow by around 25% from 2019 and 42% from sales impacted by the 2020 pandemic.
2. Lululemon saw better margin growth
Lululemon has a significantly higher gross margin than Nike. Similar to the pattern seen in revenue growth, Lululemon’s operating margin of 21% over the past twelve months is much better than 16% for Nike. Even if we looked at the change in operating margin over the past three years, Lululemon’s 21% figure is better than Nike’s 12% change. However, we expect the margins of both companies to face headwinds in the near term, given inflationary pressures and supply chain restrictions.
The net of everything
If we were to compare the financial risk, Lululemon has no debt compared to Nike’s 3.6% debt as a percentage of equity, but Lululemon’s 27% cash as a percentage of assets is less than the 36 % of Nike, which implies that Lululemon has better debt but a worse cash position compared to Nike. As such, Nike doesn’t appear to be more at risk than Lululemon. But still, the net benefit goes to Lululemon due to their higher revenue growth and better operating profit growth in the past and current scenario versus Nike, despite a higher valuation of Lululemon.
While the Lululemon stock is currently a better choice over Nike’s, several stocks look like a Better to bet than LULU action. Also, Lululemon peer comparisons summarizes how the company performs relative to its peers on the metrics that matter.
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