We are in the fog of war of the stock market tariff tantrum. News -- sometimes contradicting itself -- seems to be coming every hour from the United States government, corporations, and foreign countries as they try to figure out how to respond to the Trump tariffs enacted last week. Some countries, like Vietnam, received a shockingly high 46% tariff rate on exports to the United States, which has spooked the markets.
Apparel sellers are some of the hardest hit by this news. Nike(NYSE: NKE) and Lululemon Athletica(NASDAQ: LULU) have crashed over the past week, with both stocks down over 50% from highs set back in 2021. Does this tariff rollercoaster mean you should sell these apparel giants? Or is now the time to buck up and buy the dip? Let's dig in further and find out.
Nike's global slowdown
Before the tariff announcement, Nike struggled with a major global slowdown in its operations. Last quarter, revenue fell 9% year over year. Operating margin has slipped to 10.3% over the last 12 months, compared to a 15% level just a few years ago. It is no surprise then that Nike stock is down 70% from all-time highs, one of its worst drawdowns in history.
Selling into the United States is about to get tougher for Nike. The majority of its products are made in Asia, specifically countries like China and Vietnam, which now have fat tariffs on U.S. imports. So, as long as these tariffs remain, the company could see a sharp drawdown in both its profit margin and revenue in the United States this year.
One silver lining is Nike's global diversification. Less than half of its revenue comes from the United States, and the other revenue will not be impacted by tariffs (at least for now). However, Nike's North American division is by far the most profitable geography it sells into, given the high average spending power. Last quarter, Nike's North American division generated $1.4 billion in operating income. If that gets wiped out by tariffs, its earnings will collapse.
It is hard to argue that Nike will replace this revenue from other nations. Due to China's consumer depression, Nike's China revenue fell 17% year over year last quarter. Nike is in a tough spot with these tariffs if they remain on the books for the Asian nations it sources inventory from these days.
Lululemon was doing much better than Nike before the tariff announcement. Last quarter, revenue grew 13% year over year to $3.6 billion, although it is a much smaller business than Nike. China revenue grew a blistering 46% year over year. That is a delta of 63% compared to Nike's performance in the giant East Asian nation.
Profit margins were also moving in the right direction. Over the last 12 months, Lululemon has had an operating margin of 24%, which is close to a record high. Now, tariffs may upend these profit margins and send them much lower in 2025, but this is something I believe Lululemon can fight back against more than Nike.
Lululemon products are consistently more expensive than Nike, which indicates to me that they have more pricing power. If Lululemon pants go from $150 to $200 to offset tariff costs, I don't think the company will lose a bunch of core customers.
This isn't to say that tariffs won't impact Lululemon. They will. But unlike Nike, Lululemon's brand is doing quite well at the moment. It caters to an affluent customer base and is growing like gangbusters in China despite a consumer slump in that country. Lululemon is set up to succeed in almost every area compared to Nike, as both apparel companies try to navigate these steep tariff costs on U.S. imports.
Nike and Lululemon stocks have similar trailing valuations. Nike has a price-to-earnings ratio (P/E) of 18 compared to Lululemon's 16.7, even though Lululemon is growing much more quickly and is doing remarkably better in China. Either way, both stocks are trading at some of their lowest P/E ratios in years.
So, should you buy these stocks on the tariff-induced dip? Reading the above sections, I think you already know that my answer will be nuanced.
Lululemon is trading at a dirt cheap P/E ratio. While its earnings may slip in 2025, I believe its business momentum can continue over the long haul and deliver gains for shareholders. Nike's business was cracking before the tariffs, with revenue and profit margins falling. With these tariffs, earnings could fall precipitously in 2025 while global demand is slowing down.
For anyone looking to buy the dip on apparel stocks, I would buy Lululemon but avoid Nike at this moment.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool has a disclosure policy.
