David Olive: The Faceoff: Lululemon and Nike have thrived through the pandemic, and will reap more benefits once COVID-19 is behind us

Still a good fit for a growth portfolio

Among the latest investment themes on Bay Street is that apparel sales will surge as we put the pandemic behind us. After about a year of lockdown, prolonged over-eating, idleness and lack of fitness means for millions of us, our clothes will no longer fit. But not all apparel stocks will be lifted equally by the wardrobe replacement activity. With their relentless new-product development, Nike Inc. and Lululemon Athletica Inc. (LULU-NASDAQ) are among the sector’s most reliable performers. Revenues at Vancouver-based Lululemon have almost doubled in the past five years, to $ 4.9 billion in its latest fiscal year. And strong pandemic-era sales enabled the firm to post a 44 per cent gain in share value in the past year, to a recent $ 433. Lululemon has an ambitious five-year goal of doubling its menswear and digital sales by 2023. The latter accounted for almost 43 per cent of sales in the firm’s latest quarter. Lululemon aims to quadruple sales outside of Canada, expanding its existing network of 491 stores in North America, Europe and the Pacific Rim. The company recently expanded into “home workouts,” on-demand online fitness sessions tailored to a work-from-home trend that is expected to outlast the pandemic. Among the caveats: Lululemon doesn’t pay a dividend. Its stock is expensive, with a price-earnings multiple north of 80. And analysts punish the stock when Lululemon merely meets its projected growth targets rather than exceeding them.

Watch for sluggishness in this apparel giant

Like Lululemon, Nike Inc. (NKE-NYSE) benefited from continued strong consumer interest in “athleisure” gear during the pandemic-induced recession. And its stock gains in the past year, of 40 per cent, matched those of its Canadian peer. Nike’s 2020 share gains outpaced apparel sector gains by about 4-1. But while Lululemon has a record of consistent earnings growth — its profits have more than doubled in the past five years — profit growth at Nike has been choppy. Earnings at the Beaverton, Ore.-based behemoth, with annual revenues of $ 47.6 billion (U.S.), fell 34 per cent in the firm’s latest fiscal year. And revenue growth has been slow, at 15 per cent over the past five years, compared to Lululemon’s 89 per cent surge. Nike stands to make further revenue gains with its own shift to online sales. It benefits from a must-have brand cache that enables it to command premium prices for its steady output of restyled footwear, sportswear and accessories. And Nike has a sprawling retail network, unrivalled in the apparel sector, that includes its own stores, department stores, sporting goods and specialty athletic stores and pro shops at golf courses and tennis clubs, among its many distribution channels. But at $ 174, the stock is trading near its five-year high of $ 183. The stock is expensive, trading at a price-earnings multiple of 79. And the stock pays a modest dividend of 0.8 per cent.

Bottom line

These two pandemic winners are poised for further growth. They each are dominant players in their markets, and are vigilant in new-product development. But Nike can’t boast Lululemon’s record of consistent profit growth.

David Olive
David Olive is a Toronto-based business columnist for the Star.