Personal Finance

Better Buy: Lululemon Athletica Inc. vs. Nike Inc

LULU Chart

Nike (NYSE: NKE) and lululemon athletica (NASDAQ: LULU) are both serving the healthy lifestyle megatrend, and both have very strong brands. Nike has been more consistent in recent years, but the problems that slowed Lululemon's growth a few years ago appear to be fixed.

What do Nike and Lululemon offer investors going forward?

Brand power

LULU Chart

LULU data by YCharts .

Lululemon has not had the advantage of leadership consistency like Nike. However, CEO Laurent Potdevin is very capable. He joined the company during a difficult time, when one of Lululemon's top-selling yoga pants had to be recalled because of poor quality checks in the supply chain. And, Potdevin is also well-liked by Lululemon employees, earning a Glassdoor rating of 90%.

Valuation

In the end, the choice comes down to whether you're looking for slow and steady with less risk, or fast and nimble with more risk. In addition to relatively lower business risk, Nike offers investors a dividend yield of 1.3%, whereas Lululemon has no dividend payout. This reflects the relative growth opportunities of both businesses. Nike is large and more saturated in its core geographies, while Lululemon still has plenty of room to grow in the U.S. and around the world. So, it makes sense for Lululemon to reinvest all of its earnings in the business at this point.

Considering Nike and Lululemon's relative risk-to-reward profile, both businesses trade for reasonable valuations. Nike's price-to-earnings , or PE ratio on next year's expected earnings is 21, while Lululemon's is 26. Lululemon deserves to trade at a higher PE ratio because of its higher future growth potential.

The growth prospects of the industry still look promising, so investors should do well with either Nike or Lululemon -- or perhaps both.

10 stocks we like better than Lululemon Athletica

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and Lululemon Athletica wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017.

John Ballard has no position in any stocks mentioned. The Motley Fool owns shares of and recommends lululemon athletica and Nike. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

LULU NKE

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More