Limited Brands Beats, Ups Outlook - Analyst Blog

Limited Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted second-quarter 2011 results. The quarterly earnings of 48 cents a share beat the Zacks Consensus Estimate of 46 cents, and rose 33% from 36 cents earned in the prior-year quarter riding on an improving sales environment.

The quarterly earnings also came ahead of the company’s guidance range of 38 cents to 43 cents a share provided earlier. The better-than-expected results, prompted management to raise its August comparable-store sales and fiscal 2011 earnings outlook.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), posted net sales of $2,458.1 million that climbed 10% from the prior-year quarter, and also came ahead of the Zacks Consensus Estimate of $2,437 million.

Comparable-store sales for the quarter jumped 9% compared with 7% registered in the year-earlier quarter. Comps rose 6% in May, 12% in June and 6% in July. The consumers, who cut back their discretionary spending during the recession, are now gradually loosening their wallets.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 11% to $1,064 million, whereas comps were also up by 12%. Victoria's Secret Direct sales inched up 1% to $393 million. La Senza comps rose marginally by 1% during the quarter.

Total Victoria Secret sales grew 8% to $1,570.7 million, driven by an 11% rise in comps. Bath & Body Works & The White Barn Candle Co.’s total sales were up 5% to $563 million with a 4% increase in comps.

Despite a 6% increase in cost of goods sold, buying and occupancy, gross profit for the quarter surged 16% to $902.1 million, powered by an increase in the top-line, whereas gross margin expanded 200 basis points to 36.7%. Operating income soared 30% to $307 million, whereas operating margin expanded 190 basis points to 12.5%.

Let’s Walk Through Guidance

Management now expects the third quarter earnings in the range of 17 cents to 22 cents and fiscal 2011 earnings between $2.35 and $2.50 per share. Earlier, Limited Brands projected fiscal 2011 earnings between $2.25 and $2.45 per share.

Limited Brands now expects comparable-store sales for the third quarter to be up in the low to mid-single digit range and for fiscal 2011 to rise in the mid-single digit range. The company now forecasts August comparable-store sales to jump in the high-single-digit range compared with a low-single-digit range projected earlier.

Other Financial Details

Limited Brands ended the quarter with cash and cash equivalents of $1,034.9 million, long-term debt of 3,524.5 million and shareholders’ equity of $625.3 million.

Capital expenditures for the quarter were $85.2 million. Management anticipates capital expenditures to be approximately $425 million in fiscal 2011, and expects to generate free cash flows of about $700 million.

Our View

Limited Brands’ sustained focus on cost containment, inventory management, and merchandise initiatives has kept it afloat in a sluggish retail environment, as evident from its second-quarter 2011 results. The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and growth from new stores.

Victoria’s Secret Stores has been performing well, and the company is also in a constant process of revamping its La Senza brand. Limited Brands is keen to enhance its retail footprint across the globe by expanding aggressively in Canada, and other international markets. However, stiff competition and erratic consumer behavior remain stumbling blocks.

Currently, we have a long-term Neutral rating on Limited Brands, which operates 2,951 stores. The stock holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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