Should Investors Buy Nike Stock Instead of Lululemon? | NKE Stock vs. LULU Stock

Nike and Lululemon are two beaten down athletic apparel retailers that are trading near their 52- week lows. I wanted to see which one of these two beaten down stocks is a better buying opportunity right now. Let's jump right into it. >> I want to thank the Mly Fool for sponsoring this video. Visit full.com/parkkev for the 10 best stocks to buy now. So, Nike and Lululemon are experiencing similar headwinds that are stalling sales growth and in fact turning them backward. Overall, Nike is still a much bigger company with $46 billion in trailing 12 month sales with Lululemon right on its heels. Well, I shouldn't say right on its heels, but Lululemon was growing faster and catching up to nightly before these recent headwinds. Lululemon generates 11 billion in annual sales. Looking forward, their sales are both likely to remain muted. The management teams at both companies downgraded their growth expectations in the near term and are still trying to deal with these macroeconomic headwinds like tariffs and decreasing disposable income. Interestingly, even though Lululemon was and is the smaller company when measured by revenue, it's generating better profit margins than Nike, Lululemon's products are more premium, sold at higher average selling prices, and that's allowed the company to generate higher margins. Over the previous decade, Lululemon has comfortably generated better operating profit margins than Nike. And in the most recent period, Lululemon's operating margin came in at 18%. While Nikes came in at 8.8%. That said, Lululemon's operating margin is down from 25% to 18% while Nike's operating profit margin ticked higher primarily because of the tariff refunds Nike got. Remember, Nike paid roughly $1 billion in tariff costs. And given the Supreme Court ruled some of those tariffs illegal, the US government provided Nike with a refund of around $1 billion. And that caused Nike's profit margin in the recent quarter to jump to levels it wouldn't otherwise be. Nike's margins on an organic basis are falling as the company's offering more incentives and promotions to sell a lot of the inventory that's out in the marketplace right now. The management team keeps telling investors that there's too much inventory. We have too much product that consumers are not attracted to and so we need to offer bigger discounts to get these products sold. The return on invested capital also favors Lululemon at 21.4% compared to 12.4% for Nike. So the three measures we looked at so far, Nike generates more total sales, but Lululemon has generated better growth. Lululemon also generates better operating profit margins and better returns on invested capital compared to Nike. So, let's get into valuation. And Nike has historically sold at a premium valuation compared to Lululemon when looking at the previous 3 years. Nike's forward price to earnings ratio in the most recent period right now is trading at 15.7 compared to Lululemon which is trading at a forward price to earnings of 11.4. So, Nike is selling at a premium valuation compared to Lululemon. And I don't know if Nike deserves a premium valuation compared to Lululemon. Nike's troubles are extensive. Competition is increasing, especially in the categories Nike's operating with. Nike is working diligently to rebuild the relationships it hurt during the previous leadership team's decision to go direct to consumers and cut out the middleman. So Nike has a lot of work to do and it faces similar macroeconomic headwinds as Lululemon, but it has more work to do in my opinion to get back to the levels where it's feeling comfortable with its sales position with its position with wholesalers and all of the things that need to be done on a company specific basis to make the products more competitive in the marketplace. So I also like to look at valuation using a discounted cash flow model. And for Nike, I calculated a fair value of $31 compared to its curve market price of 36. So Nike stock when measured on a discounted cash flow basis, even applying a 10% margin of safety looks slightly overvalued. But when measuring on a forward price to earnings basis, Nike looks undervalued. Comprehensively, I would say Nike stock looks slightly undervalued. Meanwhile, I calculated a fair value for Lululemon at $126. The current market price is $100. So, night Lululemon looks undervalued whether I measure it on a forward price to earnings basis or whether I measure it on a discounted cash flow basis. Lululemon stock, I can't say looks undervalued or severely undervalued at these levels. So, fair disclosure, I own Lululemon stock. I bought it about a year ago. down significantly on that position. But if I had to choose today between which one of these two stocks I would rather buy, it would still be Lululemon. The valuation is more attractive, the margins are better, and it has less work to do to rebuild the business compared to what Nike has to do to put itself back to a competitive position. Needless to say, I've got each of these ranked as buying opportunities. I like both of them at these prices, but if I had to pick one, I would pick Lululemon.