Potential Catalysts For Lululemon And The Gap Coming Up

Wells Fargo remains bullish on Outperform-rated Lululemon Athletica inc. LULU ahead of its quarterly earnings, and favors Market-Perform-rated Gap Inc GPS before its August sales results. Both results are expected on September 1.

Lululemon

The brokerage sees Lululemon's second quarter as another confirming data point that will show the business is on the right track, resulting in earnings growth and margin performance.

Wells Fargo expects gross margin to come in better-than-guidance for +120bps, which would be the company's first quarter showing gross margin expansion in more than two years.

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"Specifically, while we believe buy side expectations on the top line have come down to a degree over the past month, we [see] light comp upside potential (potential for a 6–7 percent comp vs. the Street's 5–6 percent), but more important, we believe we could see another quarter of better-than-expected gross margin (GM) and inventory management," analyst Ike Boruchow wrote in a note.

Boruchow sees EPS upside potential to his $0.37 estimate (to potentially $0.40 vs. $0.36–0.38 guide). The analyst sees comps in the mid-single digits or better area, driven by ongoing innovation in bottoms, pricing upside potential in tops, digital investment and price increases in Canada.

Gap

For Gap, Boruchow expects August comps to fall 2–3 percent, in line with Street. However, the analyst said Gap would be generating incrementally more positive results from July due to the ongoing of recovery of Old Navy.

Further, the improvement in Old Navy and slight uptick in Gap would drive less negative sales results in August.

"Should GPS begin to show some stability on the topline, we could see the shares continue to move higher in the near term as 1) inventory is well managed, 2) merch margins are already showing signs of improvement (up in Q2), and 3) compares continue to ease into Q4," Boruchow added.

At Time Of Writing...

• Shares of Gap were down 0.09 percent at $26.47 with 10 minutes left in Monday's regular trading session.
• Lululemon was down 0.01 percent at $78.18.

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