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L Brands (LB) Q3 Earnings Beat; Stock Down on View Cut

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L Brands, Inc. (LB - Free Report) came up with the fifth straight quarter of positive earnings surprise, as it reported third-quarter fiscal 2016 results. The company posted quarterly earnings of 42 cents per share that beat the Zacks Consensus Estimate of 40 cents. However, the company’s earnings declined 23.6% year over year. Foreign currency headwinds and increase in non-operating expenses impacted the bottom line.

Further, the company trimmed its fiscal 2016 guidance. Following the results, the Columbus, OH-based company’s shares declined 2.5% in the after-hours trading session on Nov 16.

This specialty retailer of women’s intimate and other apparel reported net sales of $2,581 million, up 4% from $2,481.6 million in the prior-year quarter. The figure was marginally below the Zacks Consensus Estimate of $2,583 million. L Brands recorded comparable sales (including direct sales) growth of 2% during the quarter. Store only comps were flat year over year,. We believe that the company’s operational efficiencies, together with its new and innovative collections, can be attributed to increased sales.

Sales at Victoria’s Secret Stores inched up 0.3% to $1,285.9 million, while Victoria's Secret Direct sales grew 4.5% to $298.2 million. Total Victoria’s Secret sales rose 1.1% to $1,584.1 million, whereas comparable sales declined 1%. Increase in Total Victoria’s Secret sales was primarily driven by robust performance of PINK. However, sales of bra and panty declined slightly year over year.

Bath & Body Works’ total sales jumped 9.2% to $770.2 million, with a 7% rise in comparable sales. Strong performances of the company’s home fragrance assortment drove the segment sales. Victoria’s Secret and Bath & Body Works International’s sales were up 11.7% to $103.7 million. Other revenues increased 6.2% to $123 million.

Adjusted gross profit dipped 1% to $1,025.3 million, while gross margin contracted 190 basis points (bps) to 39.7% primarily due to a decline in merchandise margin rate. On the other hand, buying and occupancy expenditure was flat as a percentage of sales. Adjusted operating income decreased 16% to $283.6 million, while the operating margin fell 270 bps to 11%. Decline in operating income was chiefly due to Victoria’s Secret.

L BRANDS INC Price, Consensus and EPS Surprise

L BRANDS INC Price, Consensus and EPS Surprise | L BRANDS INC Quote

Store Update

During the first nine months of fiscal 2016, L Brands opened 19 Victoria’s Secret stores in total and shuttered seven outlets, consequently taking the total count to 1,176 stores. During the period, 27 Bath & Body Works stores were opened but five were closed, which took the total count to 1,694 stores. Additionally, one PINK U.K. store was opened, resulting in a total of three of its kind stores. Further, the company inaugurated four Victoria’s Secret Beauty and Accessories stores, closed one store and acquired 26 such stores, increasing the count to 29 stores. During the period, one La Senza Canadian store was closed resulting in total count of 125 such stores. L Brands opened three La Senza U.S stores during the quarter. The company had 14 Victoria’s Secret U.K. and 29 Henri Bendel stores at the end of the quarter. As of Oct 29, 2016, L Brands operated 3,073 stores.

Total franchised stores as of Oct 29, 2016, were 764 that comprised 381 Victoria's Secret Beauty & Accessories, 21 Victoria’s Secret, five Pink, 150 Bath & Body Works and 207 La Senza stores.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $654 million, sharply down from the prior-year quarter figure of $1,311.2 million. The long-term debt decreased to $5,701 million from $5,712.5 million in the year-ago period. On the other hand, shareholders’ deficit stands at $1,188.3 million.

During the quarter, management incurred capital expenditures of $327.9 million, and now projects the same to be approximately $1 billion for fiscal 2016. The company now anticipates generating free cash flow of $600 million during the fiscal year.

In the quarter under review, the company repurchased 0.3 million shares for $21.9 million. At the end of the quarter, the company had $90.1 million remaining under the current share buyback program of $500 million.

Guidance

Management now projects earnings in the band of $3.56–$3.71 per share (including 7 cents impact from foreign currency headwinds) for fiscal 2016, down from the previous guidance of $3.70–$3.85 per share. On the other hand, the company expects fiscal fourth-quarter earnings in the range of $1.85–$2.00 per share.  

Analysts polled by Zacks anticipate earnings per share of $2.02 and $3.73 for fourth-quarter and fiscal 2016, respectively.

L Brands now expects comparable sales in the fourth quarter to be in the range of flat to up low-single digits year over year. For fiscal 2016, the company estimates comparable sales to increase by low-single digits and total sales to increase about 1 to 2 points higher than comps on account of square footage growth.

For both fourth-quarter and fiscal 2016, gross margin is expected to deteriorate year over year.  

Zacks Rank

Currently, L Brands carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Burlington Stores, Inc. (BURL - Free Report) , Zumiez, Inc. (ZUMZ - Free Report) and Foot Locker, Inc. (FL - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Burlington Stores delivered an average positive earnings surprise of 16.1% in the trailing four quarters and has a long-term earnings growth rate of 18.4%.

Zumiez delivered an average positive earnings surprise of 32% in the trailing four quarters and has a long-term earnings growth rate of 15%.

Foot Locker delivered an average positive earnings surprise of 3.1% in the trailing four quarters and has a long-term earnings growth rate of 9.9%.

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