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L Brands (LB) Q3 Earnings Beat, Comps Surge, Stock Gains

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Shares of L Brands, Inc. (LB - Free Report) rose 15% during the after-market trading session on Nov 18, following the company’s stronger-than-anticipated third-quarter fiscal 2020 results. Strength at Bath & Body Works segment and improved performance at Victoria’s Secret drove the quarterly results. Notably, both the top and the bottom lines grew year over year.

Evidently, L Brands remains focused on containing costs, managing inventory and optimizing capital expenditures. The company is on track with its earlier announced profit improvement plan and intends to generate approximately $400 million in annual savings.

Notably, this Zacks Rank #3 (Hold) stock has soared 175% in the past six months compared with the industry’s rally of 104.8%.

Quarterly Discussion

L Brands delivered adjusted earnings of $1.13 per share that surpassed the Zacks Consensus Estimate of 6 cents, marking the second straight beat. Remarkably, the quarterly earnings improved significantly from 2 cents reported in the year-ago period. This year-over-year increase can be attributed to higher net sales and lower general, administrative and store operating expenses.

Net sales of $3,055.3 million outpaced the Zacks Consensus Estimate of $2,673 million, and increased 14% on a year-over-year basis. Comparable sales (stores and direct business) rose 28% during the quarter against 2% decline in the year-ago period. Again, comparable sales (stores only) jumped 13% against 3% fall in the prior-year quarter.

Adjusted gross profit increased 42% year over year to $1,359.5 million during the quarter, while adjusted gross margin expanded 870 basis points to 44.5%. This expansion was driven by a significant improvement in the merchandise margin rate and buying and occupancy expense leverage. Adjusted operating income came in at $550.7 million, up considerably from $96.3 million in the year-ago quarter. Notably, adjusted operating margin increased to 18% from 3.6% in the prior-year period.

Adjusted SG&A expenses fell 6% to $808.8 million during the quarter. As a percentage of net sales, SG&A expenses contracted 570 basis points to 26.5%.

L Brands, Inc. Price, Consensus and EPS Surprise

L Brands, Inc. Price, Consensus and EPS Surprise

L Brands, Inc. price-consensus-eps-surprise-chart | L Brands, Inc. Quote

Segment Discussion

Bath & Body Works’ total sales increased 55% year over year to $1,702.2 million. While comparable sales (stores and direct business) surged 56%, comparable store sales increased 38%. Management informed that sales were robust across all regions, store types and merchandise categories. In both the company-operated stores and direct channels, the company attained double-digit growth in all categories. The company witnessed growth across categories, namely Home Fragrance, Body Care, Soaps and Sanitizers. In the stores channel, sales were up 38% to $1,201.8 million, while direct channel sales soared 132% to $446.5 million. Sales at Bath & Body Works International advanced 55% to $53.9 million.

Adjusted operating income for the segment was $494.1 million, up sharply from $208.8 million reported in the year-ago period. Notably, adjusted operating margin expanded to 29% from 19% in the prior-year quarter due to the merchandise margin rate increase coupled with buying and occupancy and SG&A expense leverage. The merchandise margin rate rose significantly during the quarter, thanks to favorable customer response to merchandise assortment that enabled management to pull back promotional activity. For the fourth quarter, the company envisions merchandise margin rate to be more in line with last year due to holiday promotions and increased online shipping costs.

Total sales for Victoria’s Secret declined 14% to $1,353.1 million. Comparable sales (stores and direct business) increased 4%, while comparable store sales declined 10%. Notably, sales in the direct business surged 42% to $470 million. The company witnessed strength across its Lingerie, PINK and Beauty businesses. Moreover, merchandise margin rate rose meaningfully in the quarter owing to efficient inventory management, strong selling execution in stores and online, and positive response to merchandise assortments that allowed management to lower promotional activity. However, we note that sales in stores fell 30% to $755.2 million during the quarter. Sales at Victoria’s Secret International declined 23% to $127.9 million. Adjusted operating income for the segment came in at $114.6 million, up sharply from adjusted operating loss of $70 million reported in the year-ago period, owing to SG&A expense leverage.

Store Update

As of Oct 31, 2020, company-operated stores were 2,681, comprising 1,746 Bath & Body Works and 935 total Victoria's Secret stores. Total Victoria's Secret stores include 704 Victoria’s Secret, 143 PINK, 23 Victoria’s Secret Canada, two PINK Canada, 38 Victoria’s Secret Beauty and Accessories, and 25 Victoria’s Secret China.

Total partner-operated stores were 743, including 269 Bath & Body Works, 101 Victoria’s Secret, 17 PINK, 195 Victoria’s Secret Beauty & Accessories. Further, partner-operated stores comprised 144 and 17 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

With respect to Bath & Body Works segment, L Brands expects roughly 56 real estate projects for fiscal 2020. Of these, 26 are new non-mall stores and about 29 are remodels, of which 12 are in non-mall locations and the remainder in better-tier malls. Year to date, the company has opened 25 of those new stores. So far in the year, the company has permanently closed 18 outlets, and anticipates approximately 30 total closures for the fiscal year. Year to date, the company has shuttered 239 Victoria’s Secret stores in the United States and Canada.

Other Financial Details

L Brands ended third quarter with cash and cash equivalents of $2,622.5 million, up from $340 million at the end of the prior-year quarter. Long-term debt increased to $6,451.3 million from $5,477.2 million a year ago. Total inventories declined 8% to $1,864.9 million. Shareholders’ deficit was $1,564 million. Management incurred capital expenditures of $76.2 million in the quarter under review.

Outlook

Andrew Meslow, CEO, stated, “We are cautious about our ability to exceed last year’s fourth quarter sales and earnings results, given anticipated constraints on store traffic, online fulfillment and shipping capacity, as well as other uncertainties related to the COVID pandemic.” Meslow further added, “We are confident in the strength of our brands and remain focused on execution and delivering the best possible outcome for the fourth quarter.”

L Brands holds a cautious outlook for the final quarter of fiscal 2020, due to the ongoing coronavirus pandemic and the potential for further restrictions. Although management remains optimistic about its product assortment for Christmas and continued solid execution in stores and online, it expects considerable challenges in generating store channel sales growth.

The company informed that historically typical holiday volumes are about three times larger per week than the average week in the third quarter. Management further added that the company may not be able to register the same number of traffic on peak days when compared with previous years due to the current capacity limitations at 25-50% of normal. Moreover, the hours that stores are permitted to be open are fewer than last year. Again, additional constraints in direct channel fulfillment and shipping capacity cannot be ruled out. Thereby, the company will be spreading big promotions over a longer time period.

Further, L Brands envisions significant cost pressure in the fourth quarter on account of higher store selling expenses, safety equipment and supply costs, increased fulfillment expense and greater parcel carrier surcharges in the direct channel.

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