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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 third-quarter 2012 financial results after the market closes on Wednesday, November 14.

The current Zacks Consensus Estimate for the quarter is pegged at 25 cents a share that remains in line with the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 24 cents and a high of 25 cents a share.

Recap of Second-Quarter 2012

Limited Brands posted second-quarter 2012 earnings of 50 cents a share that beat the Zacks Consensus Estimate by a couple of cents, and rose from 48 cents earned in the prior-year quarter. Management had earlier projected quarterly earnings between 46 cents and 48 cents a share.

Limited Brands, which competes with Gap Inc. (GPS - Free Report) and Hanesbrands Inc. (HBI - Free Report) , delivered net sales of $2,399.1 million, falling 2% from $2,458.1 million reported in the prior-year quarter, but marginally surpassing the Zacks Consensus Estimate of $2,398 million. The company posted comparable-store sales growth of 8% during the second quarter of 2012 compared with 7% in the previous quarter and 9% in the prior-year quarter.

October Comps

Limited Brands’ comparable-store sales for October 2012 rose 3% following an increase of 5% in September and 8% in August. In October 2011, the company had registered a comparable-store sales growth of 6%. Management raised its third quarter adjusted earnings guidance to a range of 23 cents to 25 cents, up from a band of 15 cents to 20 cents forecasted earlier.

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, 16 out of 20 analysts covering the stock increased their estimates, whereas none lowered the same for the third quarter of 2012. For the fourth quarter, 4 analysts revised their estimates upward, while 3 analysts made downward revisions.

For fiscal 2012, 15 analysts increased their estimates, whereas only 1 decreased the same. For fiscal 2013, 9 analysts raised their estimates, while 2 analysts trimmed the estimate.

What Drives Estimate Revisions

Limited Brands recently came out with the sales results for the third quarter that topped Zacks’ expectation. Though net sales of $2.050 billion dropped 5.7% year over year, it came ahead of the Zacks Consensus Estimate of $2.042 billion. Consequently, management raised its third quarter earnings per share outlook. Following an upbeat outlook, most of the analysts increased their estimates to better align with management’s guidance range.

However, some analysts remained on the back foot following the company’s soft comparable-store sales for the month of October. The owner of Victoria's Secret Direct and La Senza chains did sustain its growth momentum, however, rate of increase decelerated sequentially. Moreover, a projected low single-digit comps’ growth for the month of November, taking into account the adverse impact of Hurricane Sandy, made analysts cautious.

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 third quarter of 2012 increased 4 cents to 25 cents a share in the last 30 days. For the fourth quarter, the Estimate remains constant at $1.76.

For fiscal 2012 and 2013, the Zacks Consensus Estimates climbed 3 cents and 1 cent to $2.90 and $3.25, 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 4.2%. 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, and well defines the upward revision in the estimates leading to a rise in the Zacks Consensus Estimates.

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