This Nike Alternative Growth Stock Jumped 582% Over the Past Decade on Strong Fundamentals

Nike is a world leader in the athletic apparel and footwear sector, with a market cap of $143 billion. The company posted a 1.89% year-over-year (YoY) rise in revenue to $51.581 billion for the twelve months ending February 29, 2024.

However, the stock price has tanked 30% in the last three years in contrast to the 19% gain observed by the S&P 500 index. The company has struggled to regain the brand enthusiasm it once enjoyed in the early 2000s and is falling back on the goals it set at the start of this decade.

Several CEOs have called out Nike, stating "they stopped a little bit bringing in new stuff," according to JD Sports CEO Régis Schultz. He noted that "shoppers get bored very quickly." According to Nike CEO John Donahoe, the challenges around growth and innovation for the consumer-discretionary stock are attributable to the remote work policy, which hurt its competitive edge.

Consumer-discretionary stocks are companies selling products people buy with spare cash. These goods and services are nice to have but are optional, like fashion, travelling, and jewellery. Generally, consumer discretionary stocks do well during an economic boom and poorly during market upheavals.

Donahoe believes his "employees worked from home for two and a half years...And in hindsight, it turns out, it's hard to do bold, disruptive innovation, to develop a boldly disruptive shoe, on Zoom."

Nike trimmed its revenue guidance for the forthcoming fiscal year on faltering digital demand in the US and rising challenges across the Europe-Mideast-Asia region. The company's "bold, disruptive" comeback plan to rebuild the steady pipeline resulted in laying off 2% of its workforce as part of a $2 billion cost-cutting plan.

Donahoe added. "Innovation has always marked Nike in the running, as in other categories, so we're not just going to copy what other people do."

Meanwhile, This Stock Reported 24% Revenue Growth Between FY 2018-23

Lululemon Athletica, which competes in the same sector as Nike, also recorded an impressive earnings per share (EPS) growth of 28% between FY 2018-23. Its net revenue in 2023 increased 19% YoY to $9.6 billion, as the fast-growing brand added 56 net new company-operated stores over the year, ending with 711 stores.

For a while now, Lululemon has consistently posted higher operating margins than Nike and continues to witness demand despite elevated inflation and high living costs. While it is tough to achieve long-standing success in the dynamic fashion sector as consumer preferences continue to shift erratically, Lululemon's senior management maintains the brand's relevance through incredible marketing, innovation, and premium products.

The company is hinging onto its "Power of Three ×2" growth plan strategy to double net revenue to $12.5 billion by 2026 from $6.25 billion in 2021 via product development, enhanced guest experience, a broader market outreach, and ramping up e-commerce operations.

Lululemon Athletica CEO Calvin McDonald, in the latest quarterly earnings call, said: "We are pleased with the strong finish to our 2023 fiscal year and continue to be ahead of our Power of Three ×2 strategy.

During the fourth quarter, we saw continued momentum across our channels, geographies, and merchandise categories, driven by our teams worldwide. As we step into 2024, we are focused on the significant opportunities ahead for Lululemon as we navigate the dynamic retail environment and deliver for guests through innovative new products and brand activations."

The company also boasts a healthy cash flow. Its cash and cash equivalents nearly doubled YoY to $2.2 billion by the end of 2023 from $1.2 billion, which is vital in supporting its expansion plans and R&D goals.

Lululemon Athletica expects to bring in net revenues between $10.7 billion and $10.8 billion for 2024, which translates to a 10-12% growth rate. The stock jumped 103% in the past five years and a whopping 582% in the past decade. The strong momentum can push the company ahead of Nike in several metrics in the coming years.

Despite beating top and bottom-line analyst estimates for the latest quarter, several brokerages slashed the stock's target price, likely because they were unhappy with the management's 10-12% growth guidance for this year. This development resulted in the stock price declining, possibly opening up a short opportunity window for long-term investors.

Furthermore, the slight valuation mismatch between Nike and Lululemon is surprising. Nike's shares traded at a forward price-to-earnings ratio of 26.96 on May 15, while Lululemon's forward P/E ratio was 28.43. Lululemon is a much smaller company than Nike, with a market cap of $43.67 billion, so you'd expect it to be much more expensive to invest in than Nike.

A high P/E ratio could mean a stock is too costly and the company is overvalued. The ratio tells you the money you can expect to invest in a stock to receive $1 of that company's earnings.

Of course, Nike is likely to be looked upon as a safer investment, given its brand history and global presence. However, based on the current valuation and stock growth outlook, Lululemon appears better positioned than most of its rivals.

Interestingly, Nike brings in more than 50% of its revenue from outside North America, whereas Lululemon makes almost 80% of its sales in the Americas segment. Hence, there may be a lot of untapped potential for the Canada-origin firm, which it plans to capitalize on through its aggressive expansion plans.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.