Better to buy: Lululemon Athletica vs. Nordstrom

The coronavirus outbreak has hit most non-essential retailers with a disastrous first half. Temporary store closures meant shoppers couldn’t enter stores and shop, and consumer concerns over rising job losses and their focus on stocking pantries meant many weren’t were in no mood to buy clothes and accessories anyway.

Luckily for retailers, some shoppers continued to buy – online. And that was the bright spot of recent revenue from Lululemon Athletica ( LULU -1.94% ) and Nordström (JWN 3.97% ). Now, as both retailers emerge from store closures and strive to get back on track, which represents the better buy?

Image source: Getty Images.

The case of Lululemon

Even though overall revenue plummeted in the last quarter, the yoga-inspired apparel maker reported a massive 70% increase in digital sales. This is after a 35% gain last year. So we know digital was on the rise at Lululemon before the coronavirus outbreak – and it’s likely that the positive trends here will continue.

Earlier this month, the five days of Lululemon sold online didn’t sit well on Wall Street, but I don’t expect discounts to become routine for the retailer. Here’s why: About 40% of the company’s apparel isn’t seasonally or trend-driven, meaning Lululemon doesn’t have to pare it down to make room for new styles. From an inventory perspective, the company said it was in good shape for the second half.

Looking further ahead, Lululemon predicts it could quadruple its business in international markets by 2023 from 2018 levels. This is after online sales in Europe and Australia each increased by more than 100 % in the last quarter.

Getting back to normal may not happen overnight. As the coronavirus outbreak continues, buyers may not focus on discretionary buying. But in the long term, Lululemon’s digital power and international outlook will clearly be a driver of growth.

The case of Nordstrom

Nordstrom, like Lululemon, benefited from its digital platform as consumers stayed home, but to a lesser extent. The department store’s online sales increased 5% in the last quarter. Nordstrom’s digital business has also seen 50% growth in new customers – that’s a positive, although only a small percentage are becoming regulars. Still, the company, which does about two-thirds of its business in brick-and-mortar stores, said its net sales fell 40% in the quarter.

While many retailers have suffered from bloated inventory during the crisis, Nordstrom is scoring a victory for inventory management. High levels of unsold items are a problem, as they represent a cost – and mean a store may not have room for newer items. Nordstrom cut revenue by about 80% in April and May and ended the quarter with inventory down 25% from the year-ago period. Before the crisis, Nordstrom already had in-store fulfillment capabilities, which normally serve around 20% of online orders. During the crisis, in-store fulfillment served half of online orders, which also helped Nordstrom reduce inventory levels.

The department store has taken various measures to increase liquidity and reduce cash burn, such as suspending dividends, drawing $800 million from a revolving line of credit and cutting costs.

Lululemon or Nordstrom?

Since the coronavirus outbreak is a temporary situation, I looked back to see how businesses were doing before the pandemic. If growth has been strong and a company has handled the crisis well, I tend to be optimistic about its recovery.

Prior to the health crisis, Lululemon had seen steady growth in annual revenue for more than a decade. Nordstrom had increased its revenue over the same period – until last year. Like other department stores, Nordstrom is grappling with declining mall foot traffic and changing consumer shopping habits, and its shares are down 63% so far this year. But until we have a better idea of ​​how and when Nordstrom might recover, it’s too early to consider its actions a bargain.

Shares of Lululemon soared 35% this year on Friday morning and are trading near an all-time high. Although it is a bit pricey, it may be worth paying for it retailergrowth prospects.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Andrew Miller

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