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Earnings Preview: Limited Brands

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Limited Brands Inc. , a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and an S&P 500 company, is scheduled to report its second-quarter 2012 financial results after the market closes on Wednesday, August 15.

The current Zacks Consensus Estimate for the quarter is pegged at 48 cents a share, in line with the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 47 cents and a high of 48 cents a share. The Zacks Consensus estimates revenue to be at $2,398 million for the quarter.

Recap of First-Quarter 2012

Limited Brands posted first-quarter 2012 earnings of 41 cents a share beat the Zacks Consensus Estimate by a penny, and rose from 40 cents earned in the prior-year quarter.

Limited Brands, which competes with Gap Inc. (GPS - Free Report) and Hanesbrands Inc. (HBI - Free Report) , posted net sales of $2,153.8 million skidding 3% from the prior-year quarter, and falling short of the Zacks Consensus Estimate of $2,155 million. Limited Brands posted comparable-store sales growth of 7% during the first quarter of 2012 compared with 7% in the previous quarter and 15% in the prior-year quarter.

Agreement of Estimate Revisions

The agreement of estimate revisions indicates that majority of the analysts were unanimous in their opinion. In the last 30 days, 12 out of 19 analysts covering the stock increased their estimates, whereas only 1 analyst lowered the same for the second quarter of 2012. For the third quarter, 3 analysts revised their estimates upward and one made a downward revision.

For fiscal 2012 and 2013, 12 and 9 analysts, respectively, revised their estimates in the upward direction in the last 30 days, whereas one analyst trimmed the estimate for the aforesaid fiscal years.

What Drives Estimate Revisions

Clearly, a positive sentiment is palpable among most of the analysts, who remain optimistic on Limited Brands’ performance. Following July comparable-stores results, the Zacks Consensus Estimates have been portraying an upward trend with the majority of analysts remaining bullish on the stock.

Limited Brands posted strong comparable-store sales results for the four-week period ended July 28, 2012. The company’s comparable-store sales for July 2012 rose 12% following an increase of 7% in June and compared with a 6% growth in July 2011. The increase resulted from strong sales at its Victoria's Secret Stores and Bath & Body Works.

The better-than-expected July comparable-store sales performance prompted management to raise second-quarter 2012 earnings guidance to a range of 46 cents to 48 cents from 40 cents to 45 cents forecasted earlier.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.

The Zacks Consensus Estimate for the second quarter of 2012 increased by a penny to 48 cents a share in the last 30 days. For the third quarter, the Estimate remains constant at 24 cents.

For fiscal 2012 and 2013, the Zacks Consensus Estimates climbed 2 cents and 1 cent to $2.84 and $3.20, respectively, in the last 30 days.

Positive Earnings Surprise History

With respect to earnings surprises, Limited Brands has topped the Zacks Consensus Estimate over the last four quarters in the range of 2.5% to 4.4%. The average remained at 3.4%, suggesting that Limited Brands has outpaced the Zacks Consensus Estimate by that magnitude in the trailing four quarters.

Given the past performance, we expect the company to outperform the Zacks Consensus Estimate in the upcoming quarterly results.

Let’s Conclude

The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and new stores. Victoria’s Secret Stores have been performing well, and the company is also revamping its La Senza brand.

Limited Brands intends to augment its retail footprint across the globe by expanding aggressively in Canada and other international markets. Moreover, the company’s strong liquidity positions it for growth as well as higher returns. However, stiff competition and erratic consumer behavior still remain matters of concern.

Currently, we have a long-term Neutral recommendation on the stock. However, Limited Brands retains a Zacks #2 Rank that translates into a short-term Buy rating.

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