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L Brands (LB) Q3 Earnings Meet, Sales Beat, Stock Down 4%

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L Brands, Inc. reported mixed financial numbers in third-quarter fiscal 2017, wherein earnings of 30 cents per share came in line with the Zacks Consensus Estimate after beating the same in the trailing eight quarters. However, revenues surpassed the consensus mark for the first time in five quarters.

Nevertheless, the company’s bottom line declined 29% year over year, which was not well perceived by investors as the stock declined 4.3% in after-hours trading on Nov 15.

However, in the last 30 days, the stock has witnessed a sharp rally of 18.7%, outperforming the industry’s 5.9% increase as it finally broke its declining streak of comparable sales in October. The company’s comps increased 2% in October following a decline of 2%, 4%, 7%, 9%, 7%, 5%, 10%, 13% and 4% in September, August, July, June, May, April, March, February and January, respectively.

This specialty retailer of women’s intimate and other apparels reported net sales of $2,617.8 million, up 1% from the prior-year quarter. The figure was also above the Zacks Consensus Estimate of $2,607 million. However, L Brands comparable sales (including direct sales) were down 1% during the quarter. Further, store only comps also decreased 3% year over year. During the quarter, the exit of the swim and apparel categories had an adverse impact of 2% each to total company comps and Victoria’s Secret comps.

Sales at Victoria’s Secret Stores declined 3.3% to $1,243 million, while Victoria's Secret Direct sales slipped 0.8% to $295.3 million. Total Victoria’s Secret sales decreased 3% to $1,538.9 million, while comparable sales fell 4%. Decrease in total Victoria’s Secret sales can primarily be attributable to low-single digits’ fall in lingerie bra sales in comparison to the prior-year quarter’s figure. However, PINK registered sales growth in mid-single digits, whereas Beauty witnessed a low-single digit rise.

In an effort to streamline Victoria’s Secret business, the company made some strategic changes in 2016. L Brands had earlier stated that these strategic efforts will continue in 2017, which might put pressure on the company’s full-year results. However, it is confident of achieving a long-term improvement and envisions an increase of 10% in annual operating income.

Bath & Body Works’ total sales rose 6% to $815.8 million with a 4% climb in comparable sales. Strong performances by the company’s home fragrance assortment drove the segment sales. Victoria’s Secret and Bath & Body Works International’s sales were up 11% to $114.9 million. Other revenues jumped 20% to $148.2 million.

Gross profit dipped 4% to $988.4 million, while gross margin contracted 190 basis points (bps) to 37.8%, primarily due to buying and occupancy expenditure deleverage during the quarter and also due to fall in merchandise margin rate. Adjusted operating income dropped 18% to $231.7 million, while the operating margin reduced 220 bps to 8.8%.

L Brands, Inc. Price, Consensus and EPS Surprise

Store Update

During the quarter, L Brands opened three Victoria’s Secret stores and shuttered eight outlets, consequently taking the total count to 1,178 stores. In the period, 25 Bath & Body Works stores were unveiled and 14 were closed, which took the total count to 1,704 stores. The company had 16 Victoria’s Secret U.K. and 29 Henri Bendel stores at the end of the reported quarter. As of Oct 28, 2017, L Brands operated 3,087 stores.

Total franchised stores as of Oct 28, 2017 were 803 comprising 244 Victoria’s Secret Beauty & Accessories, 30 Victoria’s Secret, five Pink, 154 Bath & Body Works and 194 La Senza stores.

Other Financial Details

The company exited the quarter with cash and cash equivalents of $734.9 million, up from the prior-year quarter’s tally of $654 million. The long-term debt increased marginally to $5,704.7 million from $5,701 million a year ago. Also, shareholders’ deficit is pegged at $1,119.1 million.

During the third quarter, management incurred capital expenditures of $227.8 million. The company now projects the same to be roughly $750 million for fiscal 2017 compared with the prior estimate of $800 million. The company continues to anticipate generating free cash flow of $650-$700 million during the fiscal year.

In the quarter under review, the company repurchased 3.8 million shares for $149.2 million. At the quarter-end, it had $211.4 million remaining under the current share buyback program of $250 million.

Guidance

Management now projects earnings in the band of $3.05-$3.20 per share for fiscal 2017 compared with the previous guidance of $3.00-$3.20. This expectation however, sharply falls below the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. Additionally, the company expects fiscal fourth-quarter earnings in the range of $1.95-$2.10 compared with the prior-year quarter earnings of $2.03.

Analysts polled by Zacks anticipate earnings per share of $2.03 and $3.12 for fourth-quarter and fiscal 2017, respectively.

The Zacks Rank #3 (Hold) company anticipates fourth-quarter comparable sales (excluding Victoria's Secret swim and apparel) in the range of flat to up low-single digit. For fiscal 2017, the company envisions comparable sales to be flat and anticipates total sales growth of about 3-4 points higher than comps on account of square footage growth and a 53rd week.

Gross margin is anticipated to deteriorate year over year during the fourth quarter and fiscal 2017 as well.

Interested in the Retail Space? Check These

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American Eagle Outfitters delivered an average positive earnings surprise of 3.9% in the trailing four quarters and has a long-term earnings growth rate of 8.7%.

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