Best Stock to Buy Right Now: Nike Vs. Lululemon

It was a tough year for NIKE (NKE -0.25%) and Lululemon Athletica (LULU 0.06%) investors, both stocks sold off sharply. Nike shares are down about 25% year-to-date, while Lululemon has fared worse, falling about 50% in 2024.

The two fitness brands have key differences, but are under pressure from changing consumer spending dynamics and disappointing results.

That said, volatility can sometimes present an opportunity for investors to pick up shares in a downtrodden industry leader at an attractive price. Let’s explore which stocks might be the best to buy.

Image source: Getty Images.

The case for Nike

Nike is known worldwide for its iconic logo, which appears 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 to fashion and pop culture.

Unfortunately, the reputation took a hit. In fiscal 2024 (for the period ending May 31), Nike reported revenue growth of just 1 percent, a slowdown from 10 percent growth in 2023. Management cited excess inventory at the wholesale level. This forced retail partners to reject new orders as they faced limited demand from price-conscious consumers.

The headlines aren’t pretty, but it’s important to recognize the strengths of Nike’s fundamentals. Even with the weak trend, the company did a good job of maintaining profitability, with efforts to control expenses helping margins grow last year. 2024 earnings per share (EPS) of $3.73 was up 15% year-over-year.

Management views the current fiscal year 2025 as a transition year with ongoing sales. The plan is to focus on growth areas while remaining bullish on the long-term outlook as inventory levels normalize. Some confidence in the company’s ability to execute on a turnaround strategy could eventually reward shareholders as a good reason to become 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 in the face of poor results. The company stands out as a pioneer in sports, combining comfortable and fashionable clothing for both training and casual environments.

In this case, even though the company posted sales growth of 7% in the most recent second quarter (ended June 30), the growth slowdown was deeper than the 18% rate in the year-ago quarter and an average of over 20% in the previous period. the last five years.

Lululemon continues to find success expanding internationally, driving most of the continued growth, though other metrics paint a more worrisome picture. Second-quarter comparable-store sales in the Americas fell 3 percent, raising some concern that the company’s potential in markets such as the United States may have peaked or may continue to deteriorate.

Management sees this increase in the road as temporary, pointing to a still-strong forecast for full-year total revenue growth of around 8.5% and record EPS of $13.95 to $14.15, up 10% mid-year 2023.

For investors, the appeal of Lululemon stock today starts with the assumption that its sales have gone too far. Despite the macroeconomic challenges, the company remains a growth story with several tailwinds.

It’s time to make a decision

A backdrop of market pessimism with low expectations means both Nike and Lululemon shares have room to deliver better-than-expected results. I won’t be surprised if shares of both companies are 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, which translates into greater flexibility to make adjustments that can jump-start growth. This is in contrast to Lululemon, which has built a large and loyal customer base but has relatively specialized offerings.

In terms of valuation, Nike shares are currently trading at 22 times trailing 12-month EPS. While this is above Lululemon’s P/E of 20, I think Nike’s premium is justified given its more balanced risk profile and proven track record. Buying Nike shares today also gives investors a 1.8% dividend yield, while Lululemon, a non-dividend payer, could remain more volatile in a scenario where its growth weakens.