LULU: Lululemon vs. Under Armour: Which Stock is a Better Buy?

Lululemon Athletica Inc. (LULU - Get Rating) and Under Armour, Inc. (UAA - Get Rating) are two of the leading athletic apparel retailers. Both companies have reaped the benefits of a market that is turning increasingly to at-home workouts during the current pandemic and opting for comfortable athletic wear over other apparel.

With their expansion into new markets, these companies are expected to grab the attention of new consumers that will likely drive their growth well into 2021.

LULU has gained 400.3% over the past 3 years, while UAA returned 29.1% over this period. In terms of performance over the past nine-months, LULU is the clear winner with an 80.8% gain versus UAA’s 49.8% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

On October 29th, LULU released Impact Agenda, which outlines the company’s long-term strategy to become a more sustainable and equitable business. The company plans to invest $75 million in its global communities to drive impact through partnerships and advocacy.

Earlier this year, the company announced a definitive agreement to acquire MIRROR, a leading in-home fitness company, to bolster LULU’s digital sweat life offerings and bring personalized solutions to its new and existing clients. This acquisition will further expand LULU’s business.

On October 30^th, UAA announced a definitive agreement to sell its the MyFitnessPal platform to Francisco Partners. UAA hopes the This agreement will enable it UAA to invest flexibly to drive greater returns.

Recent Financial Results

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In the third quarter ended November 30,2020, LULU’s revenue surged 22% year-over-year to $1.12 billion, primarily due to a 19% rise in total comparable sales. The company’s EPS grew 13.4% year-over-year to $1.10. Gross profit increased 24.2% from the year-ago value to $627.35 million, while operating income rose 16.5% from the prior-year quarter to $204.92 million.

UAA’s direct-to-consumer revenue grew 17% year-over-year to $540 million in the third quarter ended September 30. A significant portion of the revenue increase came from its strong growth in e-commerce. The company’s footwear revenue grew 19.2% year-over-year.

Past and Expected Financial Performance

LULU’s revenue has grown at a CAGR of 15.3% over the past 5 years. The company’s total assets grew at a CAGR of 27.5% over the past three years.

Analysts expect the company’s revenue to increase 25.6% next year. LULU’s EPS is expected to grow 51.1% next year.

On the other hand, UAA’s revenue has grown at a CAGR of 4.1% over the past 5 years. The CAGR of the company’s total assets is 5.6% over the past 3 years.

Analysts expect the company’s revenue to increase 12.7% next year. UAA’s EPS is expected to grow 130.4% the next year.

Profitability

UAA’s trailing-12-month revenue is 1.17 times what LULU’s generates. But LULU is more profitable, with a gross profit margin of 55.3% versus UAA’s 47.6%.

Moreover, LULU’s leveraged free cash flow margin of 9.9% compares favorably with UAA’s 4.4%.

Valuation

In terms of trailing-12-month P/S, LULU is currently trading at 12.43x, much more expensive than UAA, which is currently trading at 1.77x. In terms of trailing-12-month price/cash flow, LULU’s 70.80x is 38.8% higher than UAA’s 51.02x.

POWR Ratings

Both LULU and UAA are rated “Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for LULU and UAA:

LULU has an “A” for Trade Grade, and a “B” for Buy & Hold Grade, Peer Grade and Industry Rank. In the 65-stock Fashion & Luxury industry, it is ranked #15.

UAA has an “A” for Industry Rank, a “B” for Trade Grade, and a “C” for Buy & Hold Grade and Peer Grade. It is ranked #11 out of 34 stocks in the Athletics & Recreation industry.

The Winner

While both LULU and UAA are good long-term investment bets considering their market dominance and continued expansion, LULU appears to be a better buy based on the factors discussed here. Though LULU is more expensive compared to UAA, its premium valuation is justified considering its bigger market reach.

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LULU shares were trading at $345.97 per share on Friday afternoon, down $23.10 (-6.26%). Year-to-date, LULU has gained 49.34%, versus a 15.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...