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L Brands (LB) Trims View Despite Q2 Earnings Beat, Stock Down

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L Brands, Inc. (LB - Free Report) delivered third straight quarter of positive earnings surprise, when it reported second-quarter fiscal 2018 results. Meanwhile, revenues came in line with the Zacks Consensus Estimate.

Despite reporting better-than-expected earnings, the company lowered its fiscal 2018 guidance. Consequently, shares of L Brands decreased 5.1% in after-market trading on Aug 22. However, management is trying all means to bring the company back on growth trajectory but soft guidance gives an indication that it has to put in more efforts to turn the things around.

Further, we note that the company’s Victoria’s Secret chain has been bearing the brunt of consumers’ changing preferences, stiff competition and heavy discounts. In fact, these factors seem to have hit investors’ confidence in the stock. Evidently, L Brands has tumbled 33.1% in the past six months against the industry’s 9.7% growth.

Detailed Quarterly Discussion

In the quarter under review, L Brands’ quarterly earnings came in at 36 cents per share, which outpaced the Zacks Consensus Estimate by a couple of cents. The bottom-line figure also came above the company’s initial guidance of 30-35 cents. Favorable tax rates boosted the company’s earnings by 2 cents. However, the bottom line declined 25% year over year. Per L Brands, robust results at Bath & Body Works and Victoria’s Secret Beauty overshadowed the company’s dismal performance at PINK and Victoria’s Secret Lingerie.

Meanwhile, net sales advanced 8.3% to $2,983.8 million. The top-line figure was almost in line with the Zacks Consensus Estimate of $2,983.9 million. Furthermore, L Brands’ comparable sales (including direct sales) were up 3% in the quarter.  However, store-only comps decreased 1% year over year.

While sales at Victoria’s Secret Stores inched up 1% to $1,364.8 million, Victoria's Secret direct sales increased 21.9% to $360 million. Total Victoria’s Secret sales rose 4.8% to $1,724.8 million, while comparable sales declined 1%.

Bath & Body Works’ total sales were up 12% to $963.6 million, with a 10% rise in comparable sales. Victoria’s Secret and Bath & Body Works International sales surged 27.7% to $145.4 million. Other revenues increased 11.5% to $150 million.

Gross profit grew 3% to $1,059 million, while gross margin decreased 180 basis points (bps) to 35.5%. Gross margin contraction can be primarily attributed to reduction in merchandise margin rate. Operating income plunged 24.2% to $228.1 million, with the operating margin contracting 330 bps to 7.6%.

L Brands, Inc. Price, Consensus and EPS Surprise

Store Update

In the first six months of fiscal 2018, L Brands opened one Victoria’s Secret store and shuttered six outlets, taking the total count to 1,165 stores. In the same period, 22 Bath & Body Works stores were inaugurated and 13 were closed, which totaled to 1,703 stores. At the end of the second quarter, this specialty retailer of women’s intimate and other apparel had 62 International stores, 23 Henri Bendel stores and 123 La Senza stores (the United States and Canada). As of Aug 4, 2018, L Brands operated 3,076 stores.

Total franchised stores (as of Aug 4, 2018) were 844, including 237 Victoria’s Secret Beauty & Accessories, 37 Victoria’s Secret, eight Pink, 196 Bath & Body Works and 187 La Senza stores. Also, the franchised stores comprised 171 and eight Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

Other Financial Details

L Brands exited the quarter with cash and cash equivalents of $842.7 million, down from the prior-year quarter’s tally of $1,360.3 million. Long-term debt increased marginally to $5,711.8 million from $5,703.6 million a year ago. Shareholders’ deficit came in at $1,122.2 million.

For fiscal 2018, the company projects capital expenditures to be between $625 million and $650 million, down from $675 million and $700 million projected earlier. It continues anticipating free cash flow of $800 million for the same period.

In the quarter under review, the company repurchased 3 million shares for $103.6 million. At the quarter-end, it had $88.7 million remaining under the current share buyback program of $250 million.

Guidance

Management issued guidance for the third quarter and lowered its view for fiscal 2018.

L Brands anticipates third-quarter comps to rise in low-single digits. Further, gross margin is expected to decline year over year and SG&A costs are anticipated to escalate considerably as a percentage of sales. Gross margin will be negatively impacted by decrease in merchandise margin rate, and buying and occupancy expense deleverage. Earnings per share are envisioned in the range of break even to 5 cents compared with 30 cents registered in the prior-year quarter.

For fiscal 2018, the company anticipates comps to be up low-single digits. Gross margin rate is likely to decrease year over year. Also, SG&A costs are expected to increase year over year.

All said, management lowered its fiscal 2018 earnings per share guidance from the range of $2.70-$3.00 to $2.45-$2.70. L Brands posted earnings of $3.20 per share a year ago. The company anticipates total sales growth of about 3-4 points higher than comps on account of square footage and international growth and also owing to implementation of the new accounting standard for revenue recognition.

Currently, the Zacks Consensus Estimate for earnings per share is pegged at 15 cents and $2.75 for third-quarter and fiscal 2018, respectively.

Zacks Rank & Key Picks

L Brands currently has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include The Buckle, Inc. (BKE - Free Report) , Urban Outfitters, Inc. (URBN - Free Report) and DSW Inc. (DSW - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Buckle reported better-than-expected earnings in each of the trailing four quarters, with an average of 9.7%.

Urban Outfitters has an impressive long-term earnings growth rate of 12%.

DSW delivered better-than-expected earnings in the trailing two quarters.

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