The Battle of the Athletic Apparel Retailers

by Beth Gaston Moon | March 21, 2012 9:36 am

Lululemon[1]One has leagues of celebrity endorsers and a logo that’s among the most recognizable in the world. The other sells yoga and running pants, some varieties of which are priced in the triple-digit area. But Nike (NYSE:NKE[2]) and Lululemon Athletica (NASDAQ:LULU[3]) will come together tomorrow when they report quarterly earnings results. Both stocks are near all-time highs, and both companies have a solid track record of positive earnings surprises. Which is the better pick for the short-term?

Nike has overtaken two barriers of technical resistance in the past several months. First, late last year, it toppled the $95 level, which had acted as a ceiling on the shares for much of 2011. Several weeks ago, it took out round-number resistance at $100. The stock has gained 15% so far in 2012 and is exploring uncharted new-high territory.

The company has topped analysts’ earnings expectations in six of the past eight quarters. Most recently (on Dec. 20), NKE reported per-share earnings of $1, exceeding the consensus view by three pennies. Revenue growth impressed as well, and sales expanded in every global region[4] except Japan. In response to this news, the shares jumped almost 3% the following session.

Nike’s year-over-year growth rate was 15.6% and is expected to maintain a pace of around 8.8% for the next three to five years. Its price-to-earnings (P/E) ratio is manageable at 23.88, versus 19 for the overall S&P 500 Index.

When the company reports after tomorrow’s close, analysts expect earnings of $1.17 per share, up from $1.08 last year. Revenue is targeted at $5.8 billion. The so-called whisper number[5] for NKE, however, is $1.19, suggesting that investor expectations are slightly inflated ahead of this report.

LULU is also trading at an all-time high after overcoming the $65 mark, which acted as resistance in mid-2011. Additionally, the stock recently had a successful test of support at its 10-week moving average.

While Lululemon has enjoyed eight consecutive positive earnings surprises, its last trip to the earnings confessional, on Dec. 1, wasn’t exactly cause for celebration. Per-share earnings beat estimates by two cents, but revenue missed the mark and LULU’s fourth-quarter outlook was muted[6]. The shares fell 5% that session.

Year-over-year earnings growth is strong at 37.4% and expected to keep surging almost 60% per year in the next three to five years. It’s a good thing that earnings are expected to be so strong because LULU’s P/E is currently bloated at 63.89.

Tomorrow morning, LULU hopes its earnings report is better received than its last one. Analysts are looking for per-share results of 49 cents on revenue of nearly $362 million.

So, both stocks are benefiting from solid technical uptrends, but Nike has the more recent precedent of earnings-related strength. Nike’s P/E is much lower, but LULU is projecting more significant earnings growth. What’s an investor to do? Who wins this battle in your book? 

As of this writing, Beth Gaston Moon does not own any shares mentioned here. 

  1. [Image]:
  2. NKE:
  3. LULU:
  4. sales expanded in every global region:
  5. whisper number:
  6. LULU’s fourth-quarter outlook was muted:

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