There are at least two things that Lululemon (LULU) and Nike (NKE) have in common. The first is that both businesses are primed to take advantage of a renewed trend to be healthier. The second is that both stocks are high flyers that will continue to move higher. A minor difference is that Lululemon is growing at an incredible pace as the firm expands into new regions. Nike has already done this, but Nike is still developing new products to meet the demand of elite athletes and individuals simply looking to live a healthier life.
The key for both companies will be a trend in exercise. Recently, Nike has been thriving due to incredible running shoe sales. This may be due in part to consumers deciding to purchase comfortable shoes for everyday events. Whichever the case, Nike has the advantage of providing professional athletic gear; which is then promoted, advertised and purchased by fans. On the other hand, there have been recent reports that specialty shoe sales in China are slowing, but this may in fact be an isolated case with a handful a businesses.
Lululemon, on the other hand, is known for comfortable yoga clothes for women. Lululemon has branched off to offer anything from casual clothes to general exercise clothes. This has paid big dividends for Lululemon over the past few years. In fact, Lululemon's yearly revenue has more than doubled in two years. This is remarkable for a clothing company. This growth indicates that healthy living and exercise is very important to a growing minority of society. It also helps that Lululemon bases its stores in wealthy locations in order to capitalize on the social class that has the most spare time to exercise.
Nevertheless, comparing both companies' revenues it is clear that neither company is done growing. As previously mentioned, Lululemon's revenue has increased incredibly. On the other hand Nike's yearly revenues have increased almost 12% in four years. This is nothing to sneeze at for a company that has been around as long as Nike. Nike's timelessness can also be seen by viewing net profit margins. Nike has been able to consistently turn about 10% of revenue into profits. The one exclusion in the past five years was because Nike's margins were down across the board.
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(Source: StopETFs.com)
Unfortunately it appears Nike's fiscal year ending 2012 will fall short of this 10% region. After three quarters Nike's profit margin is 9.5%. Therefore unless Nike can produce its best quarter in a few years the 2012 profit margin will fail to keep pace with the trend.
On the other hand, Lululemon's net profit margins have increased substantially the past eight years. This should be expected because it is natural for a firm or industry in its growth phase to increase margins and revenue at incredible rates. Luckily for investors there are not any signs of slowing in the future. In fact, as I mentioned before, as the exercise trend continues to spread we will see Lululemon's clothing become more fashionable. Do not fret if this does not happen because Lululemon's financials will improve based on new store openings which will operate under the same conditions as present stores. Therefore margins will not take a hit.
While Nike and Lululemon are both in the textile industry, albeit different sub divisions, both are great plays for a medium term portfolio. Medium term in this case refers to anywhere from 1-10 years. While I am extremely bullish toward Lululemon in the future, I see hindrances if the firm expands too much. One of these issues is that once the locales that have access to Lululemon are saturated in goods, then revenues and margins will seize to increase at the same rate.
This is not something to worry about in the foreseeable future, but in the non-foreseeable future I see this as a problem (pardon the tongue twister). One issue Lululemon investors should not worry about is the possibilities of economic contraction because Lululemon focuses on wealthy locations. And during economic expansion or contraction the upper classes remain stable. Therefore Lululemon does not have to worry about that.
Nike, on the other hand is more closely connected with the majority of the population. Whether it be a billionaire looking for jogging shoes or a young NBA dreamer, Nike shoes are desirable. It also helps that Nike's slogans on their simple screen printed shirts are not only in your face, but also clever.
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(Source:Stockcharts.com)
Overall shares in Lululemon and Nike will continue to move higher. Lululemon has been on a tear the past two years and I expect this trend to continue. Nike will follow suit as well. In fact Nike is currently where I expect Lululemon to be in a decade or slightly more. Nike's stock price growth is only a fraction of Lululemon's over the past two years, but this growth will continue for the foreseeable future. Therefore these two stocks make excellent additions to a long term portfolio.
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(Source:Stockcharts.com)
Disclosure: I am long LULU.
