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L Brands (LB) Tops Q4 Earnings, Stock Hurt on Tepid View

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L Brands, Inc. came up with sixth-straight quarter of positive earnings surprise, as it reported fourth-quarter fiscal 2016 results. However, the company’s revenues marginally lagged the Zacks Consensus Estimate for the second straight quarter.

The company posted quarterly earnings of $2.03 per share that beat the Zacks Consensus Estimate of $1.90 and was also above the company’s initial guidance of $1.85–$2.00, primarily owing to favorable tax rates. However, the company’s earnings declined 5.6% year over year.

Further, the company provided dismal fiscal 2017 guidance. Following the results, the Columbus, OH-based company’s shares declined 13.1% in the after-hours trading session on Feb 22. In fact, the L Brands shares have declined 29.3% in the past three months, underperforming the Zacks categorized Retail-Apparel/Shoe industry which has witnessed a decrease of 13.9%.

This specialty retailer of women’s intimate and other apparel reported net sales of $4,489.5 million, up 2.1% from $4,395 million in the prior-year quarter. The figure was marginally below the Zacks Consensus Estimate of $4,497 million. L Brands comparable sales (including direct sales) were flat during the quarter. Further, store only comps were also flat year over year. For the fourth quarter, the exit of the swim and apparel categories had an adverse impact of 2% and 4%, respectively to total company comps.

Sales at Victoria’s Secret Stores inched up 0.8% to $2,062.7 million, while Victoria's Secret Direct sales decreased 7.2% to $526.1 million. Total Victoria’s Secret sales dipped 1% to $2,588.8 million, while comparable sales declined 3%. Decrease in Total Victoria’s Secret sales was primarily due to mid-single digits fall in lingerie sales of bra and panty in comparison with the prior-year quarter. However, PINK registered another robust quarter with an impressive sales growth of high-single digit.

In an effort to streamline Victoria’s Secret business, the company made some strategic changes in 2016. L Brands stated that the strategic efforts will persist in 2017, which is likely to put pressure on the results. However, it is confident of achieving growth in the long run and envisions growth in annual operating income by 10%.

Bath & Body Works’ total sales jumped 6.6% to $1,619.9 million, with a 5% rise in comparable sales. Strong performances of the company’s home fragrance assortment drove the segment sales. Victoria’s Secret and Bath & Body Works International’s sales were up 10.5% to $124.1 million. Other revenues increased 5.3% to $156.7 million.

Adjusted gross profit dipped 3% to $1,944 million, while gross margin contracted 230 basis points (bps) to 43.3% primarily due to decline in merchandise margin rate. Moreover, buying and occupancy expenditure increased during the quarter as the company continues its store investment program. Adjusted operating income decreased 8% to $987.5 million, while the operating margin fell 250 bps to 22%. Decline in operating income was chiefly due to Victoria’s Secret.

Store Update

During fiscal 2016, L Brands opened 72 Victoria’s Secret stores in total and shuttered 29 outlets, consequently taking the total count to 3,074 stores. During the period, 35 Bath & Body Works stores were opened but 14 were closed, which took the total count to 1,693 stores. Additionally, six PINK U.K. stores were opened and one was closed, resulting in a total of 133 of its kind stores. During the period, four La Senza Canadian stores were opened resulting in total count of 122 such stores. L Brands opened four La Senza U.S. stores during the quarter. The company had 15 Victoria’s Secret U.K. and 29 Henri Bendel stores at the end of fiscal 2016.

Total franchised stores as of Jan 28, 2017, were 781 that comprised 391 Victoria's Secret Beauty & Accessories, 23 Victoria’s Secret, five Pink, 159 Bath & Body Works and 203 La Senza stores.

L Brands, Inc. Price, Consensus and EPS Surprise

 

L Brands, Inc. Price, Consensus and EPS Surprise | L Brands, Inc. Quote

Other Financial Details

The company ended fiscal 2016 with cash and cash equivalents of $1,933.8 million, sharply down from the prior-year quarter’s figure of $2,547.8 million. The long-term debt decreased to $5,699.6 million from $5,714.8 million in the year-ago period. Moreover, shareholders’ deficit is pegged at $726.9 million.

During the fiscal year, management incurred capital expenditures of $990.5 million, and now projects the same to be in the range of $850–$900 million for fiscal 2017. The company now anticipates generating free cash flow of $650–$750 million during the fiscal year.

In the fiscal year, the company repurchased 5.7 million shares for $438.4 million. At the end of the year, it had $61.6 million remaining under the current share buyback program of $500 million. Moreover, the company announced a new share repurchase program of $250 million.

Guidance

Management now projects earnings in the band of $3.05–$3.35 per share for fiscal 2017, sharply down from the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. The earnings projection includes adverse impact of its decision to exit the swimwear category at Victoria’s Secret, continued investment in China as well as investment in real estate at Victoria’s Secret and Bath & Body Works. Moreover, the company expects the fiscal first-quarter earnings in the range of 20–25 cents.  

Analysts polled by Zacks anticipate earnings per share of 50 cents and $3.70 for first-quarter and fiscal 2017, respectively.

L Brands now expects comparable sales in the first quarter to decline in the range of high-single digit to low-double digits year over year. For fiscal 2017, the company envisions comparable sales to be down by low-single digit, and anticipates total sales growth to be about 3 to 4 points higher than comps on account of square footage growth and also due to a 53rd week. In February, the company expects comps to decline in the mid-to-high teens, which can primarily be attributed to 6% negative impact due to exit from swim and apparel.

Both for first-quarter and fiscal 2017, gross margin is expected to deteriorate year over year.

Zacks Rank

Currently, L Brands carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the retail sector include Kate Spade & Company , Zumiez, Inc. (ZUMZ - Free Report) and The Children's Place, Inc. (PLCE - Free Report) , all these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Kate Spade & Company delivered an average positive earnings surprise of 14.6% in the trailing four quarters and has a long-term earnings growth rate of 28.3%.

Zumiez delivered an average positive earnings surprise of 30.9% in the trailing four quarters and has a long-term earnings growth rate of 15%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

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