Ignore Nike and Buy This Tremendous Growth Stock Instead

Nike (no -1.11%) There haven’t been many growth stocks recently. In fact, the footwear giant reported a slight sales decline in its most recent quarter, and management expected much weaker performance in the second half of fiscal 2024.

Growth stock investors can do better.

There are other retailers in the industry who are currently reporting strong sales and profit growth. Profit margins are also unaffected by the industry’s price cuts. And in the meantime Lululemon Athletica‘S (Lulu -0.32%) Stocks aren’t cheap, and investors are getting tremendous value in return for that premium. Let’s take a look at why you might want to put your money into this incredible growth stock rather than Nike right now.

stretching for growth

Shareholders have little to complain about when it comes to Lululemon’s growth. Last quarter, sales in its core U.S. market grew 12% and 19% overall. Nike reported a disappointing 1% sales decline in its most recent quarter.

Lululemon sees ample room to expand internationally, which has been Nike’s main strength for decades. Investors can expect more growth in the future as the company makes an international push and the chain enters new demographics such as menswear and childrenswear. Lululemon is also expanding its merchandising platform to include products such as outerwear and footwear. Brand strength is reflected directly in gaining market share in these large and growing categories.

profits and cash

The athleisure specialist is also establishing a strong presence in the direct-to-consumer niche that Nike has been targeting for years. However, this is only one factor supporting Lululemon’s outstanding profitability these days.

Even bigger is the chain’s successful innovation strategy, which has boosted gross profit margins to 60% of sales by the end of 2023. By contrast, similar figures for Nike have not maintained more than 45% of sales over the past decade.

LULU Gross Profit Margin Data from YCharts

Performance gaps lead to more impressive returns. Owning Lululemon stock gives you an operating margin of 22%, almost double Nike’s 12% ratio. The chain’s revenue rose 27% last quarter.

Views and Prices

While investors shouldn’t read too much into short-term sales trends, it’s worth following them to the extent that they can reveal the bigger growth picture. In this comparison, Lululemon is the clear winner. In early January, management raised its 2023 sales and earnings outlook to call for revenue growth of up to 15% over last year’s impressive results.

Nike tempered Wall Street’s already modest expectations by saying in late December that the next six-month period would reflect much softer demand trends. That’s why, after more than a year of trying to reduce inventory levels, we’re shifting our business toward cost savings.

The downside is that Lululemon stock is expensive compared to traditional investment metrics. You’ll be paying more than 6 times the current annual sales for the business, compared to Nike’s price-to-sales ratio of 3. This valuation gap is as large as the revenue. Nike seems like a relative steal, earning 30x earnings compared to Lululemon’s 60x earnings.

Still, the athleisure apparel specialist is growing sales much faster than Nike and is able to convert a larger portion of its revenue pool directly into profits. A few more years of success in this regard could lead to premium growth stock valuations, just as they did through the pandemic and its aftermath. Even if Lululemon isn’t in your portfolio, it’s worth having on your long-term watchlist.