Lululemon Athletica vs. Adidas: Which Athletic Apparel Stock is a Better Buy?

Adidas AG (ADDYY) and lululemon athletica Inc. (LULU) are two prominent players in the athletic apparel industry. Based in Germany, ADDYY designs, produces, and markets footwear, apparel, accessories and gear, and golf products under the Adidas and Reebok brands. It sells through company-owned retail stores, mono-branded franchise stores, wholesale distribution, and e-commerce channels. On the other hand, LULU designs, manufactures, and distributes men’s and women’s athletic apparel and accessories. It sells its products through its lululemon and Ivivva-branded stores, outlets and warehouse sales, yoga studios, health clubs, fitness centers, mobile apps, and lululemon.com e-commerce website.

Social distancing restrictions and lockdowns have made consumers focus more on their health and fitness and do at-home workouts over the past year, driving the demand for athletic apparel, footwear, and related accessories. E-commerce sales have helped these companies stay afloat during the pandemic. Also, increasing vaccination rates have witnessed people join gyms, yoga centers, play sports, and other outdoor activities. This continuing demand has incentivized athleisure companies to manufacture flexible and comfortable apparel, introduce new fashion in sync with the changing consumer trends, and expand their market reach. The global athleisure market is expected to grow at an 8.6% CAGR and reach $549.41 billion by 2028. So, both ADDYY and LULU should benefit.

While ADDYY lost 18.7% over the past three months, LULU has surged 9.1%. LULU is a clear winner with 44.4% gains versus ADDYY’s negative returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

As per news released on October 7, 2021, ThredUp Inc. (TDUP), an online consignment and thrift store, partnered with ADDYY on its Choose to Give Back resale program, which allows customers to send used sneakers, clothing, and accessories from any brand to ThredUp through the Adidas app in order to be reused or resold. Set to roll out on the website and in stores in 2022, this program marks ADDYY’s sustainability goals and helps reduce plastic in the fashion industry.

On October 7, 2021, LULU announced the availability of MIRROR, its popular nearly invisible interactive home gym, in almost 40 lululemon stores across Canada and available for purchase in-store and online beginning on November 22. This launch in Canada strengthens and enhances its North America Omni guest experiences with cutting-edge digital and interactive capabilities.

Recent Financial Results

ADDYY’s net sales for the third quarter, ended September 30, 2021, increased 3.4% year-over-year to €5.75 billion ($6.48 billion). The company’s gross profit came in at €2.88 billion ($3.25 billion), up 3.1% from the year-ago period. Its operating income came in at €672 million ($757.13 million), representing an 8.6% decline from the prior-year value. ADDYY’s net income came in at €960 million ($1.08 billion), indicating a 76.1% rise from the year-ago period. Its EPS from continuing and discontinued operations increased 76.4% year-over-year to €4.94. As of September 30, 2021, the company had €3.60 billion ($4.06 billion) in cash and cash equivalents.

For the fiscal second quarter ended August 1, 2021, LULU’s net revenue increased 60.7% year-over-year to $1.45 billion. The company’s gross profit came in at $842.69 million, representing a 72.2% rise from the prior-year period. LULU’s non-GAAP income from operations came in at $299.17 million, up 120.2% from the prior-year period. While its non-GAAP net income increased 124.1% year-over-year to $215.78 million, its EPS increased 123% to $1.65. The company had $1.17 billion in cash and cash equivalents as of August 1, 2021.

Past and Expected Financial Performance

ADDYY’s revenue and net income have grown at CAGRs of 1.4% and 10%, respectively, over the past three years. The company’s EPS has decreased at a CAGR of 2.2% over the past three years.

Analysts expect ADDYY’s EPS to grow 380.7% year-over-year in the current year and 27.7% next year. Its revenue is expected to improve marginally in the current year and 8.9% next year. Its EPS is expected to grow at a rate of 5.6% per annum over the next five years.

In comparison, LULU’s revenue and net income grew at CAGRs of 23.7% and 33.2%, respectively, over the past three years. The company’s EPS has increased at a CAGR of 34.7% over the past three years.

LULU’s EPS is expected to increase 59.8% year-over-year in the current year and 19.8% next year. The stock’s revenue is expected to grow 42.5% year-over-year in the current year and 15.9% next year. LULU’s EPS is estimated to grow at a 31.9% rate per annum over the next five years.  

Valuation

In terms of non-GAAP forward PEG, LULU is currently trading at 2.24x, which is 229.4% higher than ADDYY’s 0.68x. In terms of forward EV/Sales, ADDYY’s 2.31x compares with LULU’s 8.95x.

Profitability

ADDYY’s trailing-12-month revenue is almost 4.8 times LULU’s. However, LULU is more profitable, with a 25.1% EBITDA margin versus ADDYY’s 11.5%.

Furthermore, LULU’s ROE, ROA, and ROTC of 35.4%, 18.6%, and 23.6%, compare with ADDYY’s 20.1%, 6.4%, and 10.1%, respectively.

POWR Ratings

While LULU has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ADDYY has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

LULU has an A grade for Sentiment, consistent with optimistic analyst estimates. LULU’s EPS is expected to increase 21.6% year-over-year to $1.41 in the current year. ADDYY’s D grade for Sentiment is in sync with its bleak earnings growth outlook. Analysts expect ADDYY’s EPS to decline 82.9% year-over-year in the current year to $0.29.

LULU has an A grade for Quality, consistent with their higher-than-industry profitability ratios. LULU’s 23.6% trailing-12-month return on total capital is 202.6% higher than the 7.8% industry average. In comparison, ADDYY’s B grade for Quality reflects its relatively lower profitability ratios. ADDYY has a 10.1% trailing-12-month return on total capital, 29.6% higher than the industry average of 7.8%.

Of the 63 stocks in the A-rated Fashion & Luxury industry, LULU is ranked #39. On the other hand, ADDYY is ranked #17 of 38 stocks in the B-rated Athletics & Recreation industry.

Beyond what we have stated above, our POWR Ratings system has also rated LULU and ADDYY for Growth, Stability, Value, and Momentum. Get all LULU ratings here. Also, click here to see the additional POWR Ratings for ADDYY.

The Winner

Rising demand for athletic gear owing to the growing interest in health and fitness should enable ADDYY and LULU to deliver solid returns in the upcoming months. However, higher profit margins make LULU a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Fashion & Luxury industry, and here for those in the Athletics & Recreation industry.

LULU shares were trading at $437.91 per share on Tuesday afternoon, up $14.37 (+3.39%). Year-to-date, LULU has gained 25.83%, versus a 26.38% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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