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Lululemon or Nike: Which Is a Better Buy?

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So far this year, Lululemon Athletica (NASDAQ:LULU) and Nike (NYSE:NKE) have returned 31.6% and -2.8%, respectively. Both of the companies have outperformed the broader equity markets. The S&P 500 Index has declined by 3.1% during the same period. 

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The strong fourth-quarter performance, growth in the e-commerce business, reopening stores, and the announcement about plans to acquire MIRROR led to a rise in Lululemon’s stock price. However, the lower-than-expected first-quarter performance offset some of the declines. 

Nike reported an impressive performance in the quarter which ended on February 29. The company reported $10.1 billion, which beat analysts’ estimate of $9.80 billion. Nike’s adjusted EPS was $0.78, which outperforming analysts’ consensus estimate of $0.59. The impressive performance led to a rise in the company’s stock price. However, in the recently announced quarter, which ended on May 31, the company reported a net loss of $0.51. 

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Meanwhile, analysts expected an adjusted EPS of $0.07. Nike’s revenue of $6.31 billion also missed analysts’ expectations of $7.32 billion. The weak performance in the latest quarter led to a fall in the company’s stock price.

So far this year, Lululemon has outperformed Nike. Let’s look at analysts’ expectations for the next four quarters.

Analysts’ expectation for Lululemon

Analysts expect Lululemon to report revenue of $4.3 billion for the next four quarters. The expectations represent a growth of 10.5% from the same four quarters last year. Recently, the company signed an agreement to acquire MIRROR, an in-home fitness company, for $500 million. The acquisition will likely be complete in the second quarter of fiscal 2020. 

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Lululemon hopes that the acquisition will enhance its digital and interactive capabilities and strengthen its relationship with customers. In the last quarter, the company’s e-commerce sales grew by 68%. Lululemon wants to improve its functionality and the speed of its website to drive its e-commerce sales. The company hopes to quadruple its 2018 e-commerce sales by 2023.

Moving to the EPS, analysts expect Lululemon to report an adjusted EPS of $4.72. The amount represents a rise of 6.8% from $4.42 in the same four quarters of the previous year. The sales growth will likely drive the company’s EPS. However, the lower EBIT margin and a higher effective tax rate could offset some of the EPS growth. 

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Analysts’ expectations for Nike

For the next four quarters, analysts expect Nike to report revenues of $39.05 billion. The amount represents a rise of 4.4% from $37.4 billion in the same four quarters last year. In June, the company launched a “Consumer Direct Acceleration” program. Under the program, the company identified three areas to focus on including the future market place, its new consumer construct, and an end-to-end technology foundation. 

In 2018, the company’s management set a target of 30% digital penetration by fiscal 2023. Currently, the company expects to achieve the target two years ahead of schedule. Nike expects its overall digital penetration to reach 50%. Along with digital advancements, the company’s innovative products and its ecosystem of Nike activity apps will likely drive its revenue. 

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Moving to the EPS, analysts expect Nike to report an adjusted EPS of $2.31 in the next four quarters. The amount represents a rise of 44.3% from $1.60 in the same four quarters last year. The revenue growth and expanded EBIT margin will likely drive the company’s EPS. However, increased interest expenses and a higher effective tax rate could offset some of the declines. 

Valuation multiples and analysts’ recommendations

Lululemon and Nike are trading at a premium. As of July 3, Lululemon traded a forward PE ratio of 60.6x compared to its average forward PE ratio for the past three years of 34.7x. Similarly, Nike traded at a forward PE ratio of 41.2x, which is higher than its average forward PE ratio of 27.6x for the past three years. 

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Wall Street is bullish on both of the stocks. Among the 35 analysts that follow Lululemon, 65.7% recommend a “buy,” while 34.3% recommend a “hold.” None of the analysts recommend a “sell.” As of July 3, analysts’ consensus target price was $320.74, which represents a 12-month return potential of 5.2%.

Among the 34 analysts that follow Nike, 79.4% recommend a “buy,” 17.6% recommend a “hold,” and 2.9% recommend a “sell.” As of July 3, analysts’ consensus target price was $110.11, which represents a 12-month return potential of 11.9%.

My take

I’m more bullish on Lululemon. Although the company’s valuation looks expensive, it’s justified given its growth prospects. The acquisition of MIRROR could help Lululemon capitalize on the home-fitness boom amid the lockdown. Also, the company’s initiatives could strengthen its e-commerce sales and drive its overall revenue in the coming quarters. So, investors with a long-term horizon should accumulate the stock. 

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