Despite a higher valuation, we think that Lululemon’s stock (NASDAQ: LULU) currently is a better pick compared to Nike’s stock (NYSE: NKE), given its better revenue and margins growth. Both companies benefited from the stay-at-home orders as customers favored athleisure and comfortable clothing for spending more time at home during the pandemic. While store closures and costs did weigh on both companies during the initial lockdowns of 2020, they still benefited from growing digital sales. But how is Lululemon’s stock priced compared to Nike’s stock? Lululemon trades at about 10x trailing revenues, compared to 6x for Nike. While Lululemon’s stock appears overvalued compared to Nike’s stock, given the notable mismatch in their current P/S multiples, we still believe it is a better pick between both of the companies. This is based on comparing the revenue growth and operating margins for the two companies over recent years. Lululemon’s premium valuation should not keep you away from investing in this high-performing stock, which has demonstrated growth in revenues along with raising its profit margins in the past few years. But there is more to this comparison. Let’s step back to look at the fuller picture of 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 acknowledge that Nike generates 9x more revenues than Lululemon, the latter’s revenue growth was higher in the last twelve months – with Lululemon’s revenue rising 43% vs. 24% for Nike. To add to this, Lululemon’s revenues also grew at a CAGR of 18% in the last three years, well over the 7% figure for Nike. Looking ahead, we estimate Lululemon’s revenues to grow at a strong 67% over the next two years, compared to a 10% growth for Nike. Our Lululemon Revenues and Nike’s Revenue dashboards provide more insight into the companies’ revenues.
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Lululemon’s top line grew 61% year-over-year (y-o-y) to 1.5 billion in its most recent quarter, whereas Nike’s revenues grew 16% to $12.2 billion during the same period. While global supply chain woes have severely hurt apparel businesses heading into the important holiday shopping season, Lululemon appears to be in a better place than Nike. That said, Nike lowered its full-year guidance due to supply chain issues that hit its factories in Vietnam and Indonesia. It should be noted that almost 51% of Nike’s footwear and 30% of its apparel is made in Vietnam. In addition, rail and port congestion lengthened lead times for goods to arrive in North America and the EMEA regions for Nike. On the other hand, Lululemon provided strong guidance for the remainder of the fiscal 2021 – with sales expected to grow at around 25% compared to 2019 and 42% compared to the pandemic impacted sales of 2020.
2. Lululemon Has Seen 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 last twelve-month period is much better than 16% for Nike’s. Even if we were to look at the last three fiscal year change in operating margin, Lululemon’s 21% figure is better than Nike’s 12% change. However, we expect margins for both companies to face some headwinds in the near term, given the inflationary pressure and supply chain restrictions.
The Net of It All
If we were to look to compare the financial risk, Lululemon has no debt as compared to Nike’s 3.6% debt as a percentage of its equity, but Lululemon’s 27% cash as a percentage of assets is lower than the 36% figure for Nike’s, implying that Lululemon has better debt but a worse cash position as compared to Nike. As such, Nike does not appear to be at higher risk when compared to Lululemon. But still, the net advantage moves back to Lululemon based on its higher revenue growth and better operating income growth in the past and the current scenario as compared to Nike, despite a higher valuation for Lululemon.
While Lululemon stock may currently be a better pick as compared to Nike’s, there are several stocks that look like a Better Bet Than LULU stock. Also, Lululemon Peer Comparisons summarizes how the company fares against peers on metrics that matter.