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Limited Brands, Inc. , a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted second-quarter 2012 earnings of 50 cents a share that beat the Zacks Consensus Estimate by a couple of cents, and rose from 48 cents earned in the prior-year quarter. Management had earlier projected quarterly earnings between 46 cents and 48 cents a share.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. and Hanesbrands Inc. (HBI - Analyst Report), posted net sales of $2,399.1 million, falling 2% from $2,458.1 million reported in the prior-year quarter, but marginally surpassing the Zacks Consensus Estimate of $2,398 million. The prior-year period sales included $216.6 million from a third-party apparel sourcing business that was sold in November 2011.

Limited Brands posted comparable-store sales growth of 8% during the second quarter of 2012 compared with 7% in the previous quarter and 9% in the prior-year quarter. Comps rose 6% in May, 7% in June, and 12% in July. This indicates that consumers, who cut back on their discretionary spending during the recession, are now gradually opening their wallets.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 10% to $1,170.1 million, whereas comps were up 10%. Victoria's Secret Direct sales jumped 3% to $406.6 million. Total Victoria Secret sales grew 8% to $1,576.7 million. However, comps at La Senza edged down 3%, whereas sales tumbled 17% to $94.9 million. Bath & Body Works & The White Barn Candle Co.’s total sales rose 8% to $609.1 million, with a 7% increase in comps.

Adjusted gross profit for the quarter rose 5% to $945.3 million, aided by a 7% decline in cost of goods sold, buying and occupancy, whereas gross margin expanded 270 basis points to 39.4%. Adjusted operating income inched up 1% to $308.9 million, whereas operating margin augmented 40 basis points to 12.9%.

Other Financial Details

Limited Brands, which operates 2,906 stores, announced the payment of a special dividend of $1 per share, apart from regular quarterly dividend of 25 cents a share. Both the dividends are scheduled to be paid on September 7 to stockholders of record as on August 23.

Strolling Through Guidance

Management now expects earnings in the range of 15 cents to 20 cents for the third quarter and between $2.73 and $2.88per share for fiscal 2012, up from its previous guidance range of $2.63 to $2.83. The current Zacks Consensus Estimates for the third and fiscal 2012 are 20 cents and $2.83, respectively. For the month of August, management expects comparable-store sales to rise in the low single-digit range.

Let’s Conclude

The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores have been performing well, and the company is also revamping its La Senza brand.

Limited Brands is keen on augmenting its retail footprint internationally by expanding aggressively in Canada and other international markets. However, stiff competition and erratic consumer behavior still remain major causes of concern.

Currently, we have a long-term ‘Neutral’ recommendation on the stock. However, Limited Brands holds a Zacks #2 Rank that translates into a short-term ‘Buy’ rating.

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