It's a tale of two athletic apparel makers. Nike (NKE) reported third-quarter results that were better than Wall Street had been expecting. Lululemon Athletica's (LULU) fourth-quarter revenue was in line with estimates, but its outlook for the first quarter was disappointing.

On Nike, Morningstar Equity Analyst David Swartz says the company is facing "economic challenges in all of its major regions" including China. Swartz notes that China's high youth unemployment may be taking a toll on Nike's results.

For Lululemon, Swartz points out that the company tends to "have a history of promising low and delivering high, so I'm always a bit skeptical about their guidance." Noting the stock's sharp decline in after-hours trading, Swartz says he is one of the few analysts arguing that it is has been overvalued. "That's kind of what happens when you have an overvalued stock. If there is even a mild disappointment, the stock can fall pretty fast," Swartz says.

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Editor's note: This article was written by Stephanie Mikulich.

Video Transcript

- Lululemon and Nike out with their latest quarterly results. Let's dig into the retailer's performance with Morningstar Equity Analyst David Swartz. David, it's always good to see you. Why don't we start with Nike here, Dave? It's up about 2% in the after hours. Give us your take on that report.

DAVID SWARTZ: It looks like the EPS was a little bit higher than expected. I was at $0.63 for the quarter. So it looks like on an adjusted basis it was closer to $1, just under $1. So that's not uncommon for Nike. Nike has been consistently beating EPS estimates.

On the top line, sales are very close to what I had. I was just below 12.4 billion. And Nike reported just slightly above 12.4 billion. So the sales were in line. Obviously, this was not an extremely strong quarter. Having flat sales for Nike is not a great result. But that was anticipated because the company had told us in the last earnings call back in December that the sportswear market was weak. And several other companies have since corroborated that.

- And the sportswear market might be weak. But Nike had sort of-- for a while there had sort of been its own machine, right? And so what does it need to do to sort of get back to that place?

DAVID SWARTZ: Yeah, there's been a lot of talk in recent months about how Nike has really lost its way in some ways. The company perhaps has fallen behind some others in terms of innovation and new products. So there has been some concern about that.

Clearly, there are economic challenges in all of its major regions, including China, for example. I'm sure, as you're aware, youth unemployment in China is quite high. And that's Nike's core demographic. And the China market is extremely important for Nike, both for sales growth as well as earnings growth because it is very profitable market.

In the US, Nike still does have exposure to wholesale accounts, despite its growth in DTC over the years. And wholesale right now has been weak. We've seen negative sales reports from department stores in the last few weeks. And that does affect Nike. And then in Europe, it's been kind of mixed too.

So Nike is still the best performer in the industry. But it is impacted by industry trends just like everybody else.

- And, David, let's also switch gears talk about Lululemon, which is going in the opposite direction. It's down about 9% here in the after hours. What's your take on their results?

DAVID SWARTZ: Yeah, as you mentioned earlier, it looks like it's probably the outlook that was a bit of a concern. I was at 14% sales growth for 2024. And the press release says 10% to 11%. Now you have to remember, though, that Lululemon does have a history of promising low and delivering high.

So, you know, I'm always a bit skeptical about their guidance. But that is a bit of a disappointment. Because although 10% to 11% would be extremely strong for anybody else in the activewear industry, Lululemon has always outperformed so many others for such a long period that expectations are just really high.

And as for the stock movement, the stock is quite expensive and has been really for a long time. I've been one of the few analysts that has thought that it's been quite overvalued. And that's kind of what happens when you have an overvalued stock. If there is even a mild disappointment, the stock can fall pretty fast.

- Yeah, and indeed, the stock has already been falling a little bit year to date. It's down about 6% here. So what are you going to be looking to sort of find out on the call to get a better sense of whether this is Lululemon just sort of, as you say, typically guiding low, or if it actually is seeing growth slowing?

DAVID SWARTZ: Yeah, I'm sure there'll be questions about the situation in China, which is where Lululemon is opening a lot of stores. And the economy there is not so strong at the moment. And then also in North America, which is still its biggest market, you know, what's the outlook for new stores, some new products like the expansion into men's, for example, and footwear?

Nike-- Lululemon has been rolling out footwear. And they're going to roll out shoes for men, I think, soon. So they're going to be even more in competition with Nike and other sportswear companies. And right now, footwear is not a big enough market for Lululemon to really matter. But it is interesting to see how they say it's going to look in the future.

- David, always good to see you. Thank you for joining us today.

DAVID SWARTZ: Thanks.