What Is A Better Investment Right Now: Lululemon Or Gap?

Both retailers are competing in a market that demands a bigger online presence, so which business can sustain better long-term growth?

Sept. 17, 2020

Lululemon (NASDAQ: LULU) has continued to thrive during the pandemic and has been dubbed the ‘next Nike‘. The luxury athletic wear brand sits with a market capitalization of $53 billion, making it tough competition for other retailers like Gap which has $6.8 billion market capitalization. While it might not be performing as well as Lululemon, Gap believes its Athleta range could double its revenue if it reaches customers beyond the U.S.

Lululemon Bull vs Bear

The popular athleisure brand has had a very impressive year despite the uncertain economic climate. The company recently smashed analysts expectations, with revenue jumping 2% to $903 million at its Q2 earnings call. The bullish take on this stock by analysts is backed by the fact that online sales were up 157% compared to the same time last year, making up 64% of sales.

Looking past the figures, the good news continues as Lululemon also recently acquired at-home fitness service, Mirror. This timely purchase works well in the shift towards a work-from-home climate. Mirror was purchased in July for $500 million and has the potential to increase revenue by more than $150 million this fiscal year.

However, Lululemon hasn’t had a completely injury-free year, with net sales at its 492 out of 506 stores that reopened down by 51% for the quarter. While the recovery has been a fast one, there is always going to be the threat of the uncertainty surrounding COVID-19.

Looking ahead, the company is confident that it can expand its international presence and quadruple its sales overseas by 2023. Lululemon will also invest more in e-commerce, including its customer service call centres particularly in the lead up to holiday season.

Gap Bull vs Bear

This brand is having its 50th birthday this year and is celebrating beating its expectations last quarter with sales of $3.28 billion compared to expected $2.91 million. The real winner for the long-standing retailer is the company’s athleisure brand, Athleta, which noted a 6% increase in sales for the quarter. This product is expected to grow around 6.7% a year and reach $257.1 billion in revenue by 2026.

Gap is also focusing its resources on moving into the digital realm to try and encourage online sales, and it seems to be working! The retailer almost doubled its online sales, which made up 50% of its total revenue at its recent earnings call, as consumers purchased workout shorts, basic tees, and pajama sets.

However, overall sales dropped by 18% during the second quarter due to struggling stores and additional shipping expenses from online orders. Gap is preparing to close numerous stores that aren’t performing well.

Despite the gloomy outlook for the retailer, Gap ended the quarter with $2.2 billion in cash and equivalents, proving a solid financial ground to continue investing in the business during the pandemic.

So which stock should I buy?

While Gap has been around longer than Lululemon and has proved to be of benefit to investors over the years with five-year annualized losses of 15%, it is struggling to keep up. The retailer could recover and improve its sales with its bid to continue increasing its e-commerce presence, however, Lululemon is far ahead with an annualized return rate of nearly 40%. It seems in this case it is out with the old and in with the new, Lululemon is the winning stock here.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.