Nike Vs Lululemon Stock: Both Nike and Lululemon have successfully navigated the transition from offline retailer to online distributor of athletic wear, in spite of a global pandemic.
Lululemon Athletica [NASDAQ: LULU] operates through two business segments:
- Company-Operated Stores
- Direct to Consumer
The Company-Operated Stores segment comprises of “Lululemon Athletica” and “Ivivva Athletica” brands.
The Direct to Consumer segment is involved in the e-commerce business, selling the company’s products directly to consumers through mobile apps and on the www.lululemon.com e-commerce site.
On the other hand, NIKE, Inc [NYSE: NKE] is the American multinational conglomerate that was founded as an importer of Japanese shoes.
The company today is the world’s largest marketer of athletic footwear and apparel with presence in more than 110 countries.
In addition to manufacturing sportswear and equipment, the company operates retail stores, including NikeTowns and factory outlets. Nike, with its highly recognizable “Just Do It” and the Swoosh logo, sponsors many high-profile athletes and sports teams around the world.
For investors the question is which stock is best: Nike or Lululemon?
Lululemon Athletica 101
Lulu offers include articles of clothing such as pants, performance shirts, tops, shorts, and jackets that people can wear as they engage in healthy lifestyle and athletic activities such as running, training, dance and yoga along with other pursuits for general fitness.
In addition to athletic clothing, the company also sells accessories such as bags, socks, and yoga mats among others.
The company initially started with fitness apparel for women who aimed to strike a balance between a healthy life and a busy lifestyle. It later expanded its reach by bringing men and youth into its fold.
In fact, the company opened its first store geared towards men’s athletic clothing products in 2015 in downtown Manhattan. Lululemon has also been expanding into casual clothes for travel and work.
The company sells its products through a chain of company-operated stores, yoga studios, fitness clubs and seasonal stores, to name a few.
Founded by Dennis J. Wilson in 1998 as a retailer of yoga pants and other yoga wear, the Vancouver, Canada-based company has since expanded to sell its products internationally in more than 500 company-operated stores in the United States, Canada, the People’s Republic of China, Australia, the United Kingdom, France, Germany, the Netherlands, Japan, New Zealand, South Korea, Singapore, France, Sweden, Norway, and Switzerland and more. The company went public in 2007.
Should I Buy Lululemon Stock?
Lululemon is an excellent example of a company whose mantra for success has been to market a lifestyle rather than a product.
The company has focused its growth stratagem on its branded yoga and exercise apparel, steppingstones to a dynamic, healthy and enjoyable lifestyle.
Lululemon’s shares have risen steadily in recent years as the company’s business strategy has clicked, allowing it to create a niche for itself in the athletic apparel industry and price its products at a premium.
It has reinforced its brand image and established itself as one of the world’s most successful retailers; consumers increasingly adopt the company’s products as fashion apparel and not just for exercise purposes.
To be fair, Lululemon’s successful journey has not been without its own share of controversies, including when it had to pull out its popular black Luon yoga pants from store shelves in early 2013 after it discovered that the sheer material used was too see-through.
The long-term margin outlook for Lululemon looks solid given the fact that experts expect more people to continue shopping online even post-Covid.
Lululemon reported its quarterly earnings data and, bolstered by a surge in its e-commerce business as stay-at-home consumers preferred comfy apparel like yoga pants, the athletic apparel retailer earned 74 cents a share, topping the consensus estimate of $0.56 by $0.18.
The apparel retailer earned $902.90 million during the quarter, up 2.2% on a year-over-year basis, and comfortably above estimates for $833.81 million.
The company informed that 492 of its 506 company-run stores were open as of August 2, 2020. However, the pandemic and stay -at-home orders caused net sales to plummet by more than 50% during the quarter.
However, e-commerce has been a shining star for Lululemon throughout the pandemic. In a similar fashion to big retailers such as Gap Inc. and Nike Inc., Lululemon enjoyed stupendous growth in its online sales, which made up 61% of total net sales.
Quarantined consumers shopped from its e-commerce sites which caused online sales to jump 155%. In the first quarter of 2019, e-commerce revenue just made up 26.8% of total revenue.
There are still more reasons to be optimistic about the continuing growth of online sales as the apparel retailer boosts its online offerings with free online workouts and one-on-one video chats with sales associates.
The previous quarter results did come below analysts’ expectations for sales and profit as the contagion spread its wings and unleashed economic chaos. However, the company came back strongly in the latest quarter as it enjoyed an online sales boom with stay-at-home consumers eagerly embracing the comfy clothes offered by the company.
Lululemon stock soared 90% in 2019 and analysts expect it to continue its big rally in the coming years with the company still in its nascent stage of international expansion.
Lululemon is looking to grow its square footage in China at a 40% compound annual growth rate through 2024, while at the same time also expanding its products portfolio to reach a bigger market.
Lululemon’s main women’s business continues to flourish, and to further boost its sales and profitability, the company has also expanded successfully into the men’s category in newer markets like Europe and Asia. Lululemon’s shares have risen steadily in recent years and analysts remain upbeat about its long-term outlook.
Nike is named after the Greek goddess of victory, markets its products under its namesake brand as well as Nike Golf, Nike Pro, Nike+, Air Jordan, Nike Blazers, Air Force 1, Nike Dunk, Air Max, Foamposite, Nike Skateboarding, Nike CR7, and subsidiaries, including Brand Jordan, and Converse.
The company offers NIKE brand products in nine categories, including running, basketball, the Jordan brand, football (soccer), men’s training, women’s training, action sports, golf and sportswear.
Nike also markets sports-inspired products for children and various competitive and recreational activities such as tennis, aquatic activities, hiking, volleyball, wrestling, walking and outdoor activities.
In addition, the company sells a line of performance equipment and accessories, under the NIKE® brand name, including sports bags, socks, eyewear, skates, gloves, sport balls, timepieces, digital devices, bats and other equipment for sports activities.
The company, formerly known as Blue Ribbon Sports, Inc., was founded by University of Oregon track athlete Phil Knight and his coach, Bill Bowerman, in 1964 and is headquartered in Beaverton, Oregon.
Is Nike Stock A Buy?
Nike, the world’s largest athletic apparel company, has taken the coronavirus pandemic in its stride, soaring to all-time highs after making a strong comeback post the coronavirus stock market crash.
The threat of a looming global recession and massive commotions caused by the spread of the contagion seemed to have little impact on the company, which, riding on its incredibly powerful brand strength, delivered spectacular results.
The apparel behemoth, in an incredible turn of fortune, recovered from a loss in the prior period to earn more than two times what analysts were expecting on a per-share basis.
The coronavirus crisis compelled the apparel giant to shutter stores, first in China and later in the rest of the world. The good news is that, with easing lockdown restrictions, its stores are now largely open again.
Additionally, major sporting events around the world put on a hold by the spread of the pandemic, have started to return, thus, further bolstering its business prospects. Baseball, basketball, soccer, football and hockey events have restarted in North America, Europe and rest of the world.
NKE stock, drawing support from a renewal of economic and sporting activities and stellar results in its most recent quarter, has shot to fresh highs.
NKE Share Price: Profiting From Online Migration
The company has been a major beneficiary of consumers’ online migration. The company’s remarkable results could be attributed to a significant extent to its own website and digital sales, which kept climbing despite the challenges generated by the pandemic, especially in key markets, including the U.S. and China.
This, in fact, was acknowledged by the company’s new CEO John Donahoe who said that the contagion and lockdown measures accelerated the pace of digital adoption.
Nike’s digital strategy has been highly impressive with the company investing heavily in developing mobile apps, e-commerce relationships and its own website to focus on this segment.
The move has paid off handsomely with the sporting goods company finding great success in its endeavor of engaging more closely with its target audience through its activity apps and website.
The percentage of members working out on the Training Club App hit an all-time high, including 25 million workouts with women alone. The company’s Nike Running Club surpassed four consecutive months of 1 million downloads.
All these factors helped digital sales to surge by more than 80%. Bolstered by the stupendous success of Nike’s digital strategy, Donahoe has set a new goal to make e-commerce sales contribute to half of the company’s overall sales “in the foreseeable future.”
The Chinese Factor Cannot Be Discounted
China is one of Nike’s biggest market where it is the footwear market leader. The company’s close association with NBA and its unparalleled popularity in China has been a major tailwind for the company which witnessed its sales in the most recent quarter jump over 6% to reach $1.78 billion.
NBA enjoys unrivaled popularity in China, with the sports league being six times more popular than the three largest European soccer leagues – Germany’s Bundesliga, The English Premier League and Spain’s La Liga – combined.
Basketball’s humongous popularity presents Nike with mammoth growth opportunity as the American apparel behemoth is the league’s official sponsor and endorses most of its top players.
Things have been returning to normal in the world’s second largest economy as the country comes out of lockdown. And to add icing to the cake, the government there is urging people to indulge in more outdoor activities – nothing short of a blessing for sportswear companies like Nike.
Nike Returns To Profit
Nike reported $0.95 earnings per share for the quarter, more than double of analysts’ estimates of $0.46. The footwear maker earned $10.59 billion during the quarter, compared to analysts’ expectations of $9.15 billion.
The prior quarter had been a tumultuous one for the company, with its revenue plummeting close to 40% as record unemployment and high economic uncertainty tied to the Covid-19 crisis weighed on consumer spending.
However, Nike made a remarkable comeback in the latest quarter as the world’s largest sportswear company returned to profit blowing past the highest estimates in spectacular fashion.
Investors were concerned about the company’s losses during the initial days of the pandemic as shuttering of stores and strict lockdown restrictions led to falling sales and hurt margins. However, as the latest quarter shows, the company has been successful in navigating the coronavirus crisis.
Now, its turnaround appears to be solidly in motion, driven by growth in China and strong performance of its e-commerce business.
The sportswear company has been steadily focusing on selling directly to consumers which is expected to help the company both, during the pandemic as well as in the longer run.
Nike anticipates its revenue to grow between high single digits to low double digits this fiscal as the company still has to grapple with excess inventory. Levels are up 15% in comparison to last year owing to temporary store closures and supply chain disruptions which led to a drop in wholesale shipments to retailers.
Nike Vs Lululemon Stock: The Bottom Line
Nike is a company with a stellar record of excellent long-term performance. It is one of the most recognizable brands in the world which gives it a sustainable competitive advantage, one which is incredibly hard to replicate.
The athletic apparel titan, which dwarfs other big sports and fitness wear companies such as Adidas, Under Armour and yoga-inspired apparel specialist Lululemon Athletica, delivered solid earnings in its latest quarter.
Despite the Covid-19 crisis and economic hardships, Nike’s earnings have been strong, with consumers willing to spend on comfortable clothes, as they spend more time at home.
The first-quarter result amply demonstrates that digital prowess, historical rates of productivity, strong financial performance, best in class customer engagement and unrivaled product innovation, can help the company thrive in any environment.
Nike’s brand momentum remains robust as the company benefits from a trend to work out at home. Under the leadership of its new CEO, John Donahoe, who proudly claimed “no one can match our pace” of products innovation, Nike seems to be all set to embark on the next era of its growth.
An era that is mostly expected to be digitally led as the company devises innovative strategies to reshape its presence in the digital marketplace over the long term.
Nike’s business strategy, strong results and gradual reopening of the economy offers tremendous growth opportunity for the iconic brand.
Customers have been slow to return to malls and shopping streets, but then those who do are most likely to make a purchase. Analysts have been strongly bullish on the company, setting up consensus one-year price target of $150.
Nike digital sales are growing rapidly, courtesy its innovative apps such as Nike Training Club app which makes it extremely easy for customers to purchase workout gear from the comfort of their homes.
Nike said it wanted to focus on “more direct, personal relationships” with customers, after it ended its partnership with Amazon, believing the e-commerce giant had failed to eliminate fakes. The strategy seems to be paying off with the company generating around 30% of annual sales from selling directly to customers.
All in all, resumption of sports, socially distant fitness trends, the firm’s strategy to focus on digital, organizational revamp, and solid operational and financial metrics make Nike a phenomenal business and a solid investment option.
A few concerns remain, though, as acceleration of the U.S.-China trade war could hurt the company, given China is its fastest growing market and also about 25% of its products are made in China.
Lululemon: The company is benefitting from enduring demand for comfortable clothes
The pandemic and the ‘work from home’ culture that it has spawned has been somewhat of a disaster for many apparel companies. Stay at home employees attending videoconferencing calls have made “business up top but party below” an official fashion trend.
You may be wearing a chic blazer above and a pajama below. This is officially corroborated by the U.S. Census Bureau, which reveals that clothing and apparel retail sales have plummeted 35% and department store sales are down 19% in 2020 in comparison to last year.
The pandemic may have wiped out demand for apparel and driven many apparel companies to insolvency, but the upscale purveyor of yoga pants seemed to have skillfully bucked this trend.
It, however, in a way implies that Lululemon was spared the lashing meted out to its peers by the pandemic. The company’s sales suffered a decline of 7% to $1.55 billion through the first half of the company’s 2020 fiscal year. It is in sharp contrast to over 20% pace of growth the company boasted of in 2019.
This may not look too rosy at the moment for the athletic clothing company, but it should be noted that it is still in a much better position than its peers — implying that it continues to quickly gobble up market share.
Lululemon’s strategy of expanding beyond making athletic wear for women and bringing men and youth into its fold with a full-fledged line of athletic-inspired clothing and accessories seems to be paying off handsomely.
More than that, what allowed the company to carve a niche for itself in a crowded market was its foresightedness as the company started focusing heavily on e-commerce years ago, skillfully figuring out that direct-to-consumer sales have a much higher margin than retail operations.
Selling online has helped it reap rich dividends during the Covid crisis. As a result, the company reported a surge in its e-commerce business with its digital sales jumping 155% in its second quarter, and going a long way towards compensating for the temporary closure of its stores when the pandemic was at its peak.
And the most interesting thing to note is that, despite the dire straits that brick and mortar retailers find themselves in, Lululemon Athletica Inc. is going ahead with its proposal to open new brick-and-mortar stores across the U.S. and especially in China.
Chief Executive Officer Calvin McDonald justifies the expansion plans amidst the turbulence by stating that Lululemon’s stores are small and profitable, and well-liked by the brand’s loyal customers.
Also, the apparel maker pays attention to the goodwill it generates. For example, despite the hampered sales, the company has still been paying its full rent to the landlords unlike other major brands like Gap Inc. that suspended some payments.
Consumers of all kinds are flocking to the brand with the company focusing on building a strong brand loyalty through activities like free classes, sporting events and providing support to athletes and yoga practitioners known as yogis.
While yoga pants selling for $100 and tank tops for $58 may seem like a stretch for many people, given the battering the economy has taken, the company remains highly profitable even in a shaky year as consumers prefer its comfortable, durable and aesthetically pleasing clothes.
The company has an aggressive five-year growth plan with new apparel products in the pipeline. Lululemon has devoted more square footage to men’s outfits as part of a goal to more than double revenue in this category by 2023, while expanding its women’s and accessories business.
The retailer also remains optimistic about doubling its digital revenue and increasing its international sales by 400%. To sum it up, the apparel retailer with a healthy balance sheet, good cash reserves, zero debt, high-end athletic line, and solid growth strategy looks like an excellent investment idea.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.