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L Brands (LB) Q3 Earnings Beat, Stock Down on Dividend Cut

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L Brands, Inc. delivered fourth straight quarter of positive earnings surprise, when it reported third-quarter fiscal 2018 results. Following the quarterly results, the company raised the earnings guidance for the fiscal year.

However, shares of the company declined 4.8% in after-market trading on Nov 19. Notably, L Brands’ decision to cut dividend led to the downturn. Currently, the company is planning to reduce its annual dividend from $2.40 to $1.20. L Brands will save nearly $325 million from the reduction in dividend, which will be used in deleveraging of the company’s balance sheet.

Additionally, the company’s Victoria’s Secret chain has been bearing the brunt of consumers’ changing preferences, stiff competition and heavy discounts. In fact, these factors seem to have disappointed investors. Evidently, L Brands has lost 26% in a year’s time against the industry’s 10.1% growth.

Detailed Quarterly Discussion

In the quarter under review, L Brands’ quarterly earnings came in at 16 cents per share, which outpaced the Zacks Consensus Estimate by a penny. However, the bottom line declined 46.7% year over year. Per L Brands, robust results at Bath & Body Works overshadowed the company’s dismal performance at Victoria’s Secret.

Net sales advanced 6% to $2.77 billion. The top-line figure was almost in line with the Zacks Consensus Estimate of $2.76 billion. Furthermore, L Brands’ comparable sales (including direct sales) were up 4%.  However, store-only comps were flat year over year.

While sales at Victoria’s Secret Stores declined 5.2% to $1,177.8 million, Victoria's Secret direct sales increased 18.6% to $351 million. Total Victoria’s Secret sales rose 0.7% to $1,528.8 million, while comparable sales declined 2%.

Bath & Body Works’ total sales improved 17.2% to $956.2 million, with a 10% rise in comparable sales. Victoria’s Secret and Bath & Body Works’ international sales increased 16.6% to $134 million. Other sales rose 5.2% to $155.9 million.

Adjusted gross profit grew 3% to $1,022.9 million, while gross margin decreased 90 basis points (bps) to 36.9%. Reduction in merchandise margin rate led to the gross margin contraction. Adjusted operating income plunged 33% to $155.6 million, with the operating margin declining 320 bps to 5.6%.

L Brands, Inc. Price, Consensus and EPS Surprise

Store Update

In the first nine months of fiscal 2018, L Brands opened one Victoria’s Secret store and shuttered seven outlets, taking the total count to 1,163 stores. In the same period, 48 Bath & Body Works stores were inaugurated and 17 were closed, which totaled to 1,725 stores.

At the end of the third quarter, this specialty retailer of women’s intimate and other apparel had 69 International stores, 23 Henri Bendel stores and 125 La Senza stores (the United States and Canada). As of Nov 3, 2018, L Brands operated 3,109 stores.

Total franchised stores (as of Nov 3, 2018) were 849, including 227 Victoria’s Secret Beauty & Accessories, 42 Victoria’s Secret, eight Pink, 206 Bath & Body Works and 186 La Senza stores. Also, the franchised stores comprised 170 and 10 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

Other Financial Details

L Brands exited the quarter with cash and cash equivalents of $348.4 million, down from the prior-year quarter’s tally of $734.9 million. Long-term debt increased marginally to $5,814.3 million from $5,704.7 million a year ago. Shareholders’ deficit came in at $1,311.5 million.

For fiscal 2018, the company projects capital expenditures to be $625 million. It continues anticipating free cash flow of $800 million for the same period.

In the quarter under review, the company repurchased 0.3 million shares for $10 million. At the quarter-end, it had $78.7 million remaining under the current share buyback program of $250 million.

Guidance

Management issued guidance for the fourth quarter and raised its view for fiscal 2018.

L Brands anticipates fourth-quarter comps to rise in the range of 1-4%. Further, gross margin is expected to contract year over year. SG&A costs are anticipated to escalate considerably as a percentage of sales. Gross margin will be negatively impacted by decline in merchandise margin rate. Earnings per share are envisioned in the range of $1.90-$2.10 compared with $2.11 registered in the prior-year quarter.

For fiscal 2018, the company continues to anticipate comps to be up low-single digits. Gross margin rate is likely to decrease year over year. SG&A costs are expected to increase year over year.

Management also raised its fiscal 2018 earnings per share guidance from the range of $2.45-$2.70 to $2.60-$2.80. Last year, L Brands posted earnings of $3.20 per share. Moreover, the company anticipates total sales growth of about 3-4 points higher than comps owing to square footage and international growth as well as implementation of the new accounting standard for revenue recognition.

The Zacks Consensus Estimate for fourth-quarter and fiscal 2018 earnings per share is pegged at $1.98 and $2.65, respectively.

Zacks Rank & Other Stocks to Consider

L Brands currently has a Zacks Rank #2 (Buy). Some other top-ranked stocks worth considering in the same space include Boot Barn Holdings, Inc. (BOOT - Free Report) , The Buckle, Inc. (BKE - Free Report) and Express, Inc. (EXPR - Free Report) , each carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boot Barn Holdings reported better-than-expected earnings in three of the trailing four quarters, the average being 15.1%.

Buckle delivered better-than-expected earnings in the trailing four quarters
Express’ earnings for the current year are expected to grow by 30.6%.

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