Back to top

Image: Bigstock

Will L Brands' (LB) Soft Margin Trend Linger in Q3 Earnings?

Read MoreHide Full Article

L Brands, Inc. is slated to release third-quarter fiscal 2018 results on Nov 19. This specialty retailer of women’s intimate and other apparel, beauty, and personal care products delivered average positive earnings surprise of 5.7% in the trailing four quarters.

L Brands, Inc. Price and EPS Surprise


L Brands, Inc. Price and EPS Surprise | L Brands, Inc. Quote

Let’s see what’s in store for the company this time around.

Factors Impacting L Brands

L Brands recently came out with comparable store sales (comps) and sales results for the month of October, wherein it also unveiled sales and comps numbers for the 13-week period ended Nov 3, 2018. The company’s October comps rose 4%, whereas net sales were up 8% to $860.5 million. Delving deeper, Victoria’s Secret witnessed flat comps during the month. On the contrary, comps improved 11% for Bath & Body Works, driven by strong demand.

Moving on to the company’s callouts for the 13-week period, we note that comps rose 4% year over year, including a 2% drop at Victoria’s Secret and 13% rise at Bath & Body Works. Net sales increased 6% to $2,775 million, thereby retaining the company’s impressive top-line trend. Incidentally, second-quarter sales rose 8.3%, preceded by an 8% increase witnessed in the first quarter of fiscal 2018. Clearly, the Zacks Rank #2 (Buy) company is gaining from its efforts to revamp business, which includes improving store experience, localizing assortments and enhancing its direct business. We believe these measures facilitate the company to generate incremental sales and increase store transactions through higher conversion rate.

Soft Margins a Concern

The company’s gross margin has shown constant deceleration in the past few quarters. In the first and second quarter of fiscal 2018, gross margin contracted 120 and 180 basis points to 35.9% and 35.5%, respectively. Management earlier forecasted gross margin to decline year over year during the third quarter as well, owing to a decrease in merchandise margin rate, and buying and occupancy expense deleverage. Further, the company projected SG&A expenses to escalate considerably as a percentage of sales in the quarter. Talking of weak merchandise margins, Victoria’s Secret merchandise margin rate fell significantly in the month of October due to higher promotional activities to boost traffic. In fact, L Brands has been reeling under consumers’ changing preferences that continue to impact its Victoria’s Secret lingerie brand. Further, weakness in the Pink brand has added to its woes.

Notably, management revised its third-quarter bottom-line view along with its October sales results. The company now expects adjusted earnings to be roughly 15 cents a share. This reflects a significant rise from the prior view of breakeven to 5 cents earnings per share, on the back of strong performance at Bath & Body Works. However, the updated view depicts a decline from earnings per share of 30 cents recorded in the third quarter of fiscal 2017.

Stocks Poised to Beat Earnings Estimates

Kohl's Corporation (KSS - Free Report) has an Earnings ESP of +0.23% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The TJX Companies, Inc. (TJX - Free Report) has an Earnings ESP of +0.89% and a Zacks Rank #3.

Zumiez Inc. (ZUMZ - Free Report) has an Earnings ESP of +0.62% and a Zacks Rank #3.

The Hottest Tech Mega-Trend of All                 

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Zumiez Inc. (ZUMZ) - free report >>

The TJX Companies, Inc. (TJX) - free report >>

Kohl's Corporation (KSS) - free report >>

Published in