It's been a rough year for Nike (NYSE: NKE) and Lululemon Athletica (NASDAQ: LULU) investors, with both stocks selling off sharply. Shares of Nike are down about 25% year to date while Lululemon has fared worse, declining by around 50% in 2024.
The two fitness brands have key differences but are pressured by shifting consumer spending dynamics and disappointing results.
That being said, volatility can sometimes present an opportunity for investors to pick up shares in a beaten-down industry leader at an attractive price. Let's explore which stock could be the best to buy.
Image source: Getty Images.
The case for Nike
Nike is globally known for its iconic swoosh logo prominently featured on a wide range of sportswear including shoes, clothing, and accessories. The company is credited for its innovative designs that have crossed over from high-performance athletics into fashion and pop culture.
Unfortunately, that reputation has taken a hit. In fiscal 2024 (for the period ended May 31), Nike reported revenue growth of just 1%, marking a slowdown compared to the 10% increase in 2023. Management cited excess inventories at the wholesale level. This forced retail partners to push back on new orders while also faced limited demand from price-conscious consumers.
The headlines aren't pretty, but it's important to recognize the strong points in Nike's fundamentals. Even with the soft top-line trend, the company has done a good job of maintaining profitability with efforts to control expenses helping margins climb last year. 2024 earnings per share (EPS) of $3.73 increased by 15% on an annual basis.
Management sees the current fiscal 2025 as a transitional year with ongoing sales headwinds. The plan is to focus on areas of growth while staying optimistic in the long-term outlook as inventory levels normalize. Some confidence in the company's ability to execute a turnaround strategy could ultimately reward shareholders as a good reason to turn bullish on Nike stock now.
The case for Lululemon
The setup for Lululemon Athletica this year is similar to Nike, as Lululemon faces a reset of expectations against subdued results. The company stands out as a pioneer in athleisure, blending comfortable and fashionable clothing for both workouts and casual settings.
In this case, even as the company posted a 7% sales increase in its most recent second quarter (ended June 30), the growth slowdown has been deeper from the 18% rate in the prior year quarter and an average above 20% over the past five years.
Lululemon continues to find success expanding internationally, driving the bulk of the continued growth, although other metrics paint a more concerning picture. Second-quarter comparable store sales in the Americas declined by 3%, raising some concern that the company's potential in markets like the United States may have peaked or could deteriorate further.
Management believes this bump in the road is temporary, pointing to a still solid forecast for full-year total revenue growth of around 8.5% and record EPS between $13.95 to $14.15, up 10% at the midpoint from 2023.
For investors, the attraction of Lululemon stock today starts with an assumption that its sell-off has gone too far. Despite the macroeconomic challenges, the company remains a growth story with several tailwinds.
Time to make a decision
A backdrop of market pessimism with a lowered bar of expectations means both Nike and Lululemon stock have room to deliver better-than-expected results. I won't be surprised if shares from the two companies are both trading higher by this time next year.
On the other hand, I also think Nike is the better bet between the two right now. I like Nike's more diversified profile and broader product portfolio translating into a greater flexibility to make adjustments that can jump-start growth. This is in contrast to Lululemon, which has built a large and loyal customer following but has relatively specialized offerings.
In terms of valuation, Nike stock currently trades at 22 times its trailing-12-month EPS . While this is above Lululemon's P/E of 20, I believe Nike's premium is justified given its more balanced risk profile and proven history. Buying Nike stock today also offers investors a 1.8% dividend yield whereas Lululemon, a non-dividend payer, could remain more volatile in a scenario where its growth falters.
Should you invest $1,000 in Nike right now?
Before you buy stock in Nike, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nike wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $630,099 !*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of September 3, 2024
Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0