Nike (NKE -1.11%) hasn’t been much of a growth stock lately. The footwear giant reported a modest sales decline in the most recent quarter, in fact, and management projected even weaker results ahead for the second half of fiscal 2024.
Growth stock investors can do better.
There’s a different industry retailer that’s reporting strong sales and earnings growth right now. Its profit margins aren’t being hurt by price cuts in the industry, either. And, while Lululemon Athletica‘s (LULU -0.32%) stock isn’t cheap, investors are getting tons of value in exchange for that premium. Let’s look at why you might want to splurge on this magnificent growth stock over Nike right now.
Stretching for growth
There’s little for shareholders to complain about when it comes to Lululemon’s growth. Sales were up a robust 12% in the core U.S. market last quarter and jumped 19% overall. Nike reported a disappointing 1% revenue drop for the most recent quarter.
Lululemon is finding plenty of room to expand internationally, which has been a major strength of Nike’s for decades. Investors can expect more growth ahead from the international push and as the chain enters new demographics like men’s and kids’ wear. Lululemon is also expanding its merchandise platform to include products like outerwear and footwear. Its brand strength is translating directly into market share wins in these large, growing categories.
Profits and cash
The athleisure specialist is also well-established in the direct-to-consumer sales niche that Nike has been targeting for years. But that’s just one factor supporting Lululemon’s excellent profitability these days.
The bigger one is the chain’s successful innovation strategy that has boosted gross profit margin toward 60% of sales by late 2023. Nike’s comparable figure hasn’t been able to stay above 45% of sales in the past decade, in contrast.
LULU Gross Profit Margin data by YCharts
The performance gap translates into a more impressive bottom line as well. Owning Lululemon stock gives you exposure to a 22% operating profit margin, nearly double Nike’s 12% rate. The chain’s earnings jumped 27% this past quarter.
Outlook and price
While investors shouldn’t read too much into short-term sales trends, it’s still worth following them to the extent that they inform the bigger growth picture. Lululemon is the clear winner in this comparison. In early January, management raised their 2023 sales and earnings outlook to call for revenue gains of as much as 15% over last year’s impressive results.
Nike reined in Wall Street’s already modest expectations, saying in late December that the next six-month period will likely reflect even softer demand trends. That’s why it’s pivoting the business toward cost cuts, even after spending more than a year working on reducing inventory levels.
On the downside, Lululemon stock is expensive by traditional investment metrics. You’ll pay over 6 times annual sales for the business today, compared to Nike’s price-to-sales ratio of 3. That valuation gap is just as large on earnings. Nike looks like a relative steal at 30 times profits compared to Lululemon’s ratio of 60.
Still, the athleisure apparel specialist is growing sales much more quickly than Nike is, and it can convert more of that revenue pool directly into earnings. A few additional years of success on these points should allow it to earn that premium growth stock valuation, just as it has through the pandemic and its aftermath. Lululemon is worth having on your watchlist, then, if not in your portfolio, for the long term.
Demitri Kalogeropoulos has positions in Nike. 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.
