In this piece, I evaluated two sportswear stocks, Nike (NYSE:NKE) and Lululemon Athletica (NASDAQ:LULU), using TipRanks’ comparison tool to determine which is better. Nike is the largest supplier of athletic footwear and apparel and a major manufacturer of sports equipment, while Lululemon Athletica is a multinational athletic apparel retailer headquartered in Canada.
Shares of Nike have tumbled 13% year-to-date, plunging them into the red for the past year, off nearly 7% over the last 12 months. On the other hand, Lululemon is up 19% year-to-date and 22% over the last year.
With such a strong divergence in stock-price performance between Nike and Lululemon year-to-date, it’s no surprise that their valuations are also far off from each other. We can begin to determine which company might be more attractively valued by comparing their price-to-earnings (P/E) multiples to each other and that of their industry.
For comparison, the apparel, footwear, and accessories industry is trading at a P/E of 31.3, but a closer look is needed to figure out whether Nike or Lululemon Athletica is the better buy.
Nike (NYSE:NKE)
At a P/E of 31.85, Nike is trading in line with its industry currently, although its five-year mean P/E is 44.6 due to significant volatility over the last several years. Unfortunately, the company is dealing with soaring inventory levels, suggesting it could be depending too much on its brand strength. However, Nike’s long-term stock-price appreciation suggests it could be a solid holding at some point — if some other stipulations are met. Thus, a neutral view seems appropriate.
Nike’s latest earnings report signaled some significant problems, including the first earnings miss in three years due to lower margins. Although Nike came out slightly ahead of sales expectations, it wasn’t enough to overcome the other issues.
The biggest concern for Nike is its rising inventory levels, which rose again to $8.45 billion for the fiscal year that ended in May. While that is a significant slowdown in growth from the 2022 inventory level of $8.42 billion (which rose by 22.9%), it shows that the company isn’t out of the woods yet.
Ultimately, a better entry point may appear, or Nike could solve its inventory issue, potentially catalyzing the shares.
What is the Price Target for NKE Stock?
Nike has a Moderate Buy consensus rating based on 20 Buys, five Holds, and three Sell ratings assigned over the last three months. At $130.09, the average Nike stock price target implies upside potential of 28.2%.
Lululemon Athletica (NASDAQ:LULU)
At a P/E of 51.5, Lululemon Athletica looks significantly overvalued relative to its industry, although it is trading slightly below its five-year mean P/E of 55.5. While the company faces a potential issue that’s been impacting the entire industry, its solid gross margins and long-term price appreciation suggest a long-term bullish view may be appropriate.
Lululemon is scheduled to release its next earnings report on August 31. The consensus is calling for $2.53 per share in earnings on $2.17 billion in revenue for the most recently completed quarter. Notably, Lululemon has consistently beaten estimates for both earnings and revenue over the last five quarters, including a 16% EPS beat in the previous quarter.
Like Nike, Lululemon is also seeing rising inventory levels, albeit on a much smaller scale. The company’s inventory rose from $966.5 million in the fiscal year that ended in January 2022 to $1.4 billion in 2023 and then $1.6 billion for the last 12 months.
However, Lululemon enjoys higher margins due to its brand strength. The company’s gross margin averaged 56% over the last three years versus 42% for Nike. Still, while Lululemon’s inventory level isn’t yet dangerously high, investors may want to monitor it. Notably, its net income margin peaked at 15.6% in Fiscal 2022 before falling to 10.5% in Fiscal 2023 and then rising to 11.2% over the last 12 months — despite the rising inventory.
In short, Lululemon looks better positioned than Nike to handle the higher inventory without a massive profit hit.
What is the Price Target for LULU Stock?
Lululemon Athletica has a Moderate Buy consensus rating based on 15 Buys, one Hold, and three Sell ratings assigned over the last three months. At $423.11, the average Lululemon Athletica stock price target implies upside potential of 11.5%.
Conclusion: Neutral on NKE, Bullish on LULU
Both Nike and Lululemon enjoy robust brand strength, but currently, Lululemon’s brand looks stronger. With such a massive inventory level, Nike will likely have to slash prices for quite some time, potentially eating into its profits. At its current valuation, a wait-and-see approach may be best for Nike.
Nike stock is up almost 100,000% (including dividends) since going public decades ago. However, it’s up only 28% over the last five years as the company’s fundamentals began to raise questions. Meanwhile, Lululemon stock is up 190% over the last five years and over 2,900% since going public. Thus, it looks like a long-term buy-and-hold position, albeit with caution.
