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Limited Brands Inc. , a specialty retailer of women’s intimate and other apparel, beauty and personal care products, posted its second-quarter 2012 results on August 15. Here, we will discuss the company’s scorecard, based on its recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Review of the Last Quarter

Limited Brands posted second-quarter 2012 earnings of 50 cents a share, beating the Zacks Consensus Estimate as well as the prior-year quarter profit by a couple of cents. Management had earlier projected quarterly earnings between 46 cents and 48 cents a share.

Limited Brands reported net sales of $2,399.1 million, falling 2% from $2,458.1 million reported in the prior-year quarter, marginally surpassed 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 grew 6% in May, 7% in June, and 12% in July.

(Read full report on earnings: Limited Brands Beats, Ups Outlook)

Guidance

Management now expects earnings in the range of 15 - 20 cents for the third quarter and between $2.73 and $2.88 per share for fiscal 2012, up from its previous guidance range of $2.63 - $2.83. The current Zacks Consensus Estimates for the third quarter and fiscal 2012 are 21 cents and $2.85, respectively. For the month of August, management expects comparable-store sales to rise in the low single-digit range.

Agreement of Estimate Revision

In the last 30 days, 13 out of 16 analysts covering the stock lowered their estimates, whereas one of the estimates was revised upwards for the third quarter of 2012. On the other hand, for the fourth quarter, 13 analysts (out of 17) made upward revisions, whereas one estimate was trimmed.        

For fiscal 2012, 12 analysts (out of 18) revised their estimates upward, and two lowered the same in the last 30 days. For fiscal 2013, 12 analysts (out of a total of 18) increased their estimates and only 1 analyst made downward revisions.

What Drives Estimate Revision

For the upcoming quarter, majority of the analysts trimmed their estimates mainly due to management’s expectation of huge rise in selling, general and administrative (SG&A) expenses in third quarter 2012.

Management’s projects third-quarter SG&A rate to jump considerably 370 basis points approximately due to adverse impact from the sale of the third-party apparel sourcing business. Absent of this, the SG&A rate is expected to rise in the third quarter due to investments in store selling, store openings and remodels expenses, and marketing costs. As a result, the analysts remain skeptical on such rise in expenses, and therefore lowered their estimates for the third-quarter 2012.

However, the analysts remain positive for the fourth-quarter and fiscal 2012, on the back of company’s focus on cost containment, inventory management, and merchandise initiatives, which will assist the company to survive in the weak consumer environment.

Moreover, Limited Brands was encouraged by the first-quarter 2012 sales results and seeks to expand aggressively in Canada and internationally. The stores are generating sales volumes, nearly two and a half times more than the U.S. average.

Magnitude of Estimate Revision

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.      

The Zacks Consensus Estimate for the third quarter of 2012 has moved down by 3 cents to 21 cents a share in the last 7 days. The Zacks Consensus Estimate for the fourth quarter has increased by 3 cents to $1.75.         

For fiscal 2012, the Zacks Consensus Estimate inched up by a penny to $2.85 in the last 7 days. For fiscal 2013, the Zacks Consensus Estimate increased by couple of cents to $3.22.

Conclusion

Limited Brands is strategizing to revamp its La Senza brand both at home in Canada and internationally by improving product assortments, store operations and layout. The company had also completed the closure of the La Senza Girl freestanding stores, which had been adversely affecting the company’s overall performance.

Bath & Body Works segment is also gaining strength steadily, primarily driven by a rise in store transactions, enhancement in the direct channel business and growth from new and expanded stores. During the second quarter of 2012, Bath & Body Works’ total sales hiked 8% to $609.1 million, with a 7% increase in comps.

However, most of the company’s stores are located in retail shopping areas, such as malls and other types of retail centers, which have been adversely impacted by the recent economic turmoil. These malls have been registering lower sales volume and declining traffic, as consumers grappling with the recent economic downturn have been trading down to cheaper brands.

Limited Brands, which faces stiff competition from Gap Inc. (GPS - Analyst Report) and Hanesbrands Inc. (HBI - Analyst Report), carries a Zacks #2 Rank, implying short-term Buy rating for the next 1-3 months, whereas we maintain our long-term ‘Neutral’ recommendation on the stock.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education

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