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Limited Brands, Inc. , a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted third-quarter 2012 earnings of 26 cents a share that beat both the Zacks Consensus Estimate and the prior-year quarter earnings by a penny. The consumers, who cut back on their discretionary spending during the recession, are now gradually opening their wallets.

Management had earlier raised its third quarter adjusted earnings guidance to a range of 23 cents to 25 cents, up from a band of 15 cents to 20 cents.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. (GPS - Analyst Report) and Hanesbrands Inc. (HBI - Analyst Report), posted net sales of $2,050.2 million, falling 6% from $2,173.4 million reported in the prior-year quarter, but surpassing the Zacks Consensus Estimate of $2,045 million. The prior-year period sales included $258.7 million from a third-party apparel sourcing business that was sold in November 2011.

Limited Brands posted comparable-store sales growth of 5% during the third quarter of fiscal 2012 compared with 8% in the previous quarter and 9% in the prior-year quarter. Comps rose 8% in August, 5% in September, and 3% in October.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 7% to $1,009.2 million, whereas comps were up 6%. Victoria's Secret Direct sales fell 2% to $270.6 million. Total Victoria Secret sales grew 5% to $1,279.8 million. Bath & Body Works & The White Barn Candle Co.’s total sales rose 7% to $538.4 million, with a 5% increase in comps. However, comps at La Senza edged down 2%, whereas sales tumbled 11% to $82.9 million.

Adjusted gross profit for the quarter rose 6% to $835.6 million, aided by a 12% decline in cost of goods sold, buying and occupancy, whereas gross margin expanded 470 basis points to 40.8%. Adjusted operating income advanced 6% to $197.4 million, whereas operating margin augmented 100 basis points to 9.6%.

Other Financial Details

Limited Brands, which operates 2,887 stores, also stated that its Board of Directors authorized a share buyback program of $250 million, which includes $49.6 million remaining under the earlier announced $500 million repurchase program. The company will pay its quarterly dividend of 25 cents a share on December 10 to shareholders of record as of November 26.

Strolling Through Guidance

Management now expects earnings in the range of $1.62 to $1.77 for the fourth quarter and between $2.78 and $2.93 per share for fiscal 2012, up from its previous guidance range of $2.73 to $2.88. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2012 are $1.76 and $2.90, respectively. For the month of November, management expects comparable-store sales to rise in the low single-digits, and hinted that Hurricane Sandy adversely impacted sales at the beginning of this month, as the stores remained closed.

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, and well defines its positive earnings surprise history and an upbeat guidance.

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