Nike, Inc. (NKE), Under Armourm Inc. (UA): Which Sporty Clothing Stock Will Outperform?

Clothing can be a difficult industry. Just look at a laggard like American Apparel, or the roller coaster ride at Aeropostale, Inc. (NYSE:ARO).

As a segment, fashion and finance have never been friends. However, in clothing, accessories, and shoes, the sporty segment has certainly been a great play for investors.

Three companies in this sector have all performed strongly over the past five years. Despite a weak economy, brand sensitivity seems stronger than price sensitivity, with these premium brands finding no problem taking more money from shoppers.

Nike, Inc. (NYSE:NKE)

Nike’s latest quarterly report proved that the company is a rockstar. Nike reported quarterly earnings of 73 cents per share in the quarter ended Feb. 28 vs. 61 cents in the year-ago period. Higher earnings came from the top and bottom line as the company improved its gross margin by 30 basis points year-over-year and added 7% more future orders than it did in 2012. Sales were up in 18% in North America, while the market discounted the company’s tepid sales pace in China, where sales fell by 10% compared to the prior year period.

The footwear and apparel company is in the middle of an intensive project to remodel stores to boost sales. This is helping its same store sales growth in North America, where it dominates with consistent revenue growth and profitability.

Nike, Inc. (NYSE:NKE)’s shares appear lofty at first glace, seeing as it trades at a premium multiple to the broad market. Shares trade at 23 times earnings, but the company has delivered with exceptional growth each year since the great recession. Fully diluted TTM EPS is up to $2.57 vs. a low of $1.52 in 2009.

The company’s strong brands give it resilience, even if China’s growth story isn’t yet showing itself in earnings. North America can continue to drive Nike’s sales and profit growth, while strong branding, mindshare, and incredible distribution defends the company from competition.

Lululemon Athletica Inc. (NASDAQ:LULU)

It turns out that see-through yoga pants aren’t on the shopping list for Lululemon fans. The company expects to see write downs that will negatively affect full-year EPS by $0.27.

But other than that recent faux paus, does Lululemon’s stock offer opportunity?

This recall could prove worse than expected for this high-priced retailer. Quality control problems are no laughing matter when your product is priced at a premium to the competition. Lululemon will also face supply shortages, which puts the company’s long-term competitive edge at risk.

Once shoppers “buy down” to lower-cost products from the competition due to a shortage at Lululemon, they may never return to the most expensive player in yoga and casual attire.

At 22 times TTM EV/EBITDA, Lululemon’s stock price doesn’t seem to reflect the on-going affects of a product shortage. The company expects single-digit same store sales growth in the next quarter as it fails to restock product fast enough after a recall of its popular “Luon” fabric pants.

Investors should wait and see on the recall’s ultimate effect on Lululemon’s sales, especially given the company’s high valuation. Lululemon trades at 7.2 times trailing twelve month sales, far too high for a brand with a large supply mix up. When the story is growth, it takes only a small swing in market share to crush a company’s stock price.