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Nike vs. lululemon: Which Stock Offers More Value to Investors?
Stock Analysis & Ideas

Nike vs. lululemon: Which Stock Offers More Value to Investors?

It is time for investors to go shopping for value stocks on Wall Street. We are facing the looming prospects of the Fed hiking interest rates, persistent inflation, and geopolitical turmoil. In this scenario, value stocks offer investors an attractive buying opportunity amid a broad-based selloff among different sectors.

Value stocks are those stocks that appear to be trading cheaply compared to the underlying fundamentals of the stock. These fundamentals can be earnings, sales, or dividends. To unearth these value stocks, equity research analysts from Jeffries combed through Jeffries’ coverage universe of 1,300 companies.

This team of research analysts applied various criteria to screen for these value stocks. This included: Stocks that had a Buy rating, and stocks that are currently trading at a lower-than-sector-average forward P/E (price-to-earnings) ratio or at a higher-than-sector-average forward free cash flow yield. Moreover, this team of research analysts also looked at Jeffries earnings per share estimates for FY22 and FY23 that were higher than consensus estimates.

Free cash flow yield is defined as the ratio of free cash flow to the market capitalization of the company.

Accordingly, 23 value stocks made it to this list and one of these stocks is Nike. Let’s compare Nike to another athleisure company, lululemon, using the TipRanks stock comparison tool and see what other analysts, besides for Jeffries, are saying about both these stocks.

Nike (NYSE: NKE)

Nike has not been immune to supply chain challenges that plagued many companies in 2021. This was reflected in the company’s Fiscal Q2 results, as its revenues of $11.4 billion remained flat on a currency-neutral basis.

However, for the athletic footwear and athleisure company, demand for its products remains strong. This was underlined by Nike’s CEO and President, John Donahoe at its Fiscal Q2 earnings call.

Donahoe stated that this demand has been fueled as a majority of people around the world become conscious about health and fitness and embracing a casual lifestyle.

This view was again echoed by Jeffries analyst Randal J. Konik, after hosting a meeting with Paul Trussell, VP of Investor Relations and Strategic Finance at Nike. In the analyst’s view, demand remains strong for Nike’s brands, including Nike, Converse, and Jordan, and the company is positioned well to drive its revenues through “full-price realization.”

Moreover, Konik believes that China is a “compelling long-term growth opportunity” for Nike. However, in Fiscal Q2, NKE did not do well in China. The company’s revenues in Greater China tanked 24% (excluding currency changes) year-over-year to $1.8 billion, but Nike’s management is still optimistic about this region.

Matt Friend, EVP and CFO of Nike commented on its earnings call that while inventory supply proved to be a major disruption in Fiscal Q2 in China, the company is seeing encouraging signs there and expects FY22 “to be a year of recovery.” As a result, Nike expects a quarter-on-quarter improvement in sales in China beginning from Fiscal Q3.

When it comes to addressing supply chain challenges, analyst Konik’s conversation with Paul Trussell revealed that Nike has shifted some of its manufacturing operations to new locations and is looking at deploying more logistics tools to move its products more efficiently.

Moreover, back in December, the company had stated on its earnings call that its factories in Vietnam were again operational, “with weekly footwear and apparel production now at roughly 80 percent of pre-closure volumes.”

As a result, the company remained confident that supply will be normalized going into FY23.

Analyst Konik is also positive about Nike’s Direct strategy of selling its products through its digital platforms and through company-owned retail stores and believes it “bodes well for the company’s long-term margin performance.”

In addition, the analyst approves of Nike’s acquisition of RTFKT – a brand that offers collectibles by leveraging game engines, non-fungible tokens (NFTs), and augmented reality (AR) to create unique virtual experiences. Konik thinks that this acquisition will help NKE “capitalize upon the intersection of sport, creativity, gaming, and culture.”

As a result, the analyst is bullish about the stock with a Buy rating and a price target of $200 (41.3% upside) on the stock.

The rest of the analysts on the Street echo Konik with a Strong Buy consensus rating based on 19 Buys and 3 Holds. The average Nike stock prediction of $187.19 implies upside potential of approximately 32.2% to current levels for this stock.

lululemon (NASDAQ: LULU)

Shares of lululemon have been down 5.7% in the past month following the athleisure company’s update for the fiscal fourth quarter. While LULU had a strong 2021, it did suffer the consequences of the Omicron variant, resulting in capacity constraints, availability of staff on a limited basis, and reduced operating hours at certain locations.

As a result, the company anticipates that its net revenues will be at the low end of its Q4 outlook of $2.125 billion to $2.165 billion. Moreover, diluted earnings and adjusted earnings are also expected to be at the low end of the range, between $3.24 and $3.31 per share and $3.25 to $3.32 per share, respectively.

Following the update from the company, Guggenheim analyst Robert Drbul reduced his revenue and adjusted EPS estimates for LULU in Q4 to $2.13 billion (from $2.154 billion) and $3.27 per share from $3.32 earlier.

However, the lowered outlook for Q4 aside, analyst Drbul is still optimistic about the stock, with a Buy rating and a price target of $475 (51.5% upside) on the stock. Let’s look at some of the analyst’s reasons to be bullish about LULU.

Similar to Jeffries analyst Konik, Drbul also feels that LULU will benefit from demand tailwinds, including the move towards health, wellness, and preference for athleisure. Other key positives for the stock include no long-term debt and limited seasonality factor for LULU’s products.

The strong demand tailwinds for the stock are indicated by the fact that on a two-year basis, the company’s revenues have grown at a compounded annual growth rate (CAGR) of 26%. In Q3, the company’s revenues were up 30% year-over-year to $1.5 billion.  

Moreover, Drbul is of the opinion that the company’s inventory risk is mitigated as it has a “robust e-commerce business” and very little wholesale exposure. It is important here to note that LULU primarily conducts business through two channels: company-operated stores and a direct-to-consumer e-commerce website, lululemon.com.

The company’s management also pointed out on its Q3 earnings call that around “40% of our inventory is comprised of core seasonless product which helps us make our inventory management and flow decisions.”

Analyst Drbul foresees a strong potential for growth for LULU’s men’s athleisure wear, e-commerce, and international business.

Furthermore, the analyst expects “digital penetration to represent ~50% of total LULU revenue in 2021, up from ~30% in 2019, with likely improved margins as the company benefits from heavy, pulled-forward digital-related investments.”

Other analysts on the Street, however, are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 14 Buys and 7 Holds. The average lululemon stock prediction of $439.20 implies upside potential of approximately 40% to current levels for this stock.

Bottom Line

Analysts are bullish about NKE and cautiously optimistic about LULU. But based on the upside potential over the next 12 months, LULU seems to be a better pick.

However, according to Jeffries analyst Randy Giveans, “Nike currently trades at 29x F23E EPS [29 times the FY23 estimated EPS], which is a premium to most other athletic retailers, but a discount to LULU, which trades at 38x F23E EPS” and thinks that NKE “deserves to trade at ~40x F23E EPS.” Thus, he is highly optimistic about Nike.

Randy Giveans was among TipRanks’ top analysts of 2021.

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