Best Stock to Buy Right Now: Walmart vs. Lululemon

Investing often comes down to difficult choices. After all, you want to choose the best long-term investment, keeping in mind your risk tolerance.

No one can predict the future with 100% certainty, of course. But you can greatly improve your investment success by digging into each company to understand the business' long-term growth prospects and potential pitfalls.

Looking at individual companies, Walmart (NYSE: WMT) has built a long history of success. Lululemon Athletica (NASDAQ: LULU) hasn't been in existence for nearly as long, but it once had rapid revenue growth.

With an eye to the future, should you invest in Walmart or Lululemon?

Image source: Getty Images.

Walmart

Many people know the Walmart brand. It's become known for its ultra-low prices that attract customers. It can accomplish this since it has a relentless focus on keeping costs down.

Walmart has been operating this simple but effective business plan for a very long time, opening its first discount store more than six decades ago. Management has kept the business moving forward to remain competitive with the likes of behemoth Amazon (NASDAQ: AMZN).

This includes investing heavily in technology. That's allowed the company to offer perks like same-day pickup in its stores, fast delivery, and Walmart+, a subscription service that offers free delivery, among other benefits.

Overall high prices have dampened consumer spending, and that's hurt many retailers' results. However, shoppers remain drawn to Walmart and its low prices on a broad range of goods. At its core U.S. division, same-store sales (comps) excluding gasoline, grew 4.6% for its fiscal second-quarter (ended July 31). Impressively, traffic contributed 1.5 percentage points, while spending accounted for the balance.

Investors shouldn't feel dismayed about the quarter's tepid operating income. The period's figure, adjusted for certain items and excluding foreign-currency exchange translation effects, increased 0.4% to $8 billion. The weak year-over-year increase was partly due to higher costs from the acquired VIZIO business that weren't part of 2024 results.

Management expects operating profit to increase 3.5% to 5.5% this year, including 0.8 and 0.7 percentage point drags from VIZIO and last year had an extra day due to the leap year.

Lululemon Athletica

Lululemon designs and sells athletic apparel, footwear, and accessories. These items became popular to wear, particularly among women (63% of 2024 sales), during various activities like yoga and running. It sells these items in retail stores, including its own, and online, among other channels.

People clamored for the products, and Lululemon posted impressive revenue growth. As recently as fiscal 2023 (ended on Jan. 28, 2024), revenue grew 20%, after removing foreign-currency translation effects, to $9.6 billion.

Lately, however, top-line growth has been slower. This has partly been due to larger economic factors, but increasing competition and a lack of new products resonating with customers have also played roles. I'm more concerned with the latter two factors.

Lululemon posted second-quarter revenue growth of 6% on a constant-currency basis. Notably, its core Americas region had just 1% growth. And its retail stores saw worldwide comps increase just 1%, including a 4% drop in the Americas. The revenue growth wasn't enough to generate higher profitability. The quarter's operating income fell 3% to $523.8 million.

For the year, management now projects revenue will grow 4% to 6%, excluding the extra week that was part of last year's results. Previously, it forecast 7% to 8% growth.

Making the decision

Walmart's success hasn't been lost on the market. The shares have gained 12.7% this year through Oct. 10, besting the S&P 500 index's 11.4%. The stock sells at a higher valuation than the market, based on the trailing price-to-earnings (P/E) ratio -- a lofty 38 vs. 30 for the S&P 500.

The news about Lululemon's slowing revenue growth hasn't been well-received by investors. The shares have dropped 56% since the start of the year. With the stock selling at a P/E multiple of 11, value investors might feel tempted to purchase shares.

However, I'd resist that urge. If it were merely economic forces holding down demand, the shares might represent a bargain. However, with company-specific factors playing a role, I'd pass on Lululemon shares.

Walmart, with its simple but well-executed business, represents the better long-term buying opportunity, even though you'll pay a higher valuation.

Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Lululemon Athletica Inc., and Walmart. The Motley Fool has a disclosure policy.