The Gap Inc. (GPS) – Lululemon Athletica inc. (LULU): An Earnings Preview

Lululemon as a lifestyle brand is still promising, but with Gap and L Brands both offering yield and lower multiples Lululemon is more speculative, especially with its 16% short interest. L Brands offers a yield at 2.00% and price to sales lower at 1.56 than Lululemon. The market gives L Brands a trailing earnings multiple of 20.98.

Gap owns Banana Republic, Old Navy, and Gap. Gap offers a slightly lower yield at 1.90%, but its trailing earnings multiple is lower still at 14.90, and its price to sales is the lowest at 1.18. Gap also reported some of the best earnings results in retail this month.

Not only did the company guide higher, but comps were up 5% and its second quarter EPS increased 31% year over year to $0.64. They also increased the dividend by 60% from $0.50 in 2012 in time for the third quarter.

Gap opened six new Athleta stores in the quarter with 65 total open by year end. The company doesn’t break down sales of Athleta individually reporting sales along with  shoe company Piperlime and Intermix.

However, CEO Glenn Murphy did speak to it on the call, “Athleta, has been a very strong success for the business and we love the marketing behind it, which is Power to the She.” (source Seeking Alpha transcript)

Gross profit margin expanded by 60 bp to 40.5%. Stifel Nicolaus liked what they heard well enough to maintain their Buy and predict double digit EPS growth for several years.But don’t buy Gap because of Athleta; it is only a tiny fraction of revenues.

L Brands reported second quarter results of a 22% rise to EPS year over year, a 2% rise in comps, and raised its guidance. While Gap is a better buy, PINK is a threat to Lululemon, as its sales of casual yet feminine workout clothes, underwear, hoodies, and accessories have skyrocketed among the collegiate to young millennial set. So much so that the company opened 50 freestanding PINK stores this year, and it is increasing capital expenditure to increase PINK square footage at open Victoria’s Secret stores.

What to expect
The Luon pants recall hit is already baked into the second quarter numbers, so analysts will want to see if competitors were able to take market share from Lululemon.

Buying before earnings would only be gambling, so wait to hear what the company says. Lululemon will still grow faster than these other two over the long term, but likely won’t grow like it used to.

The article Lululemon: An Earnings Preview originally appeared on Fool.com and is written by Annalisa Kraft.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica.

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