Limited Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted third-quarter 2010 results. The quarterly earnings of 18 cents a share came a penny ahead of the Zacks Consensus Estimate, but rose substantially from 2 cents earned in the prior-year quarter riding on improving sales environment, and effective cost and inventory management.
The earnings also came well above the company’s guidance range of 3 cents to 8 cents a share.
The Zacks Consensus Estimate of 17 cents increased by 7 cents prior to the earnings announcement ,with 14 out 16 analysts covering the stock raising their estimates and none lowering their projections in the last 30 days.
Behind the Headline
Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), posted net sales of $1,983.4 million that soared 11.6% from the prior-year quarter, and outdid the Zacks Consensus Estimate of $1,977 million. The consumers who cut back their discretionary spending during the recession are now gradually opening up their wallets.
Comparable-store sales for the quarter under review climbed 10% compared with a fall of 2% registered in the year-earlier quarter. Comps rose 10% in August, 12% in September and 9% in October. Limited Brands now expects November comparable-store sales to rise in the low-single digits.
Sales at Victoria’s Secret stores increased 15% to $842 million, whereas comps were up 14%. Sales at La Senza tumbled 9% to $90 million and comps rose marginally by 1%. Victoria’s Secret Direct sales jumped 3% to $257 million. Total Victoria Secret sales grew 10.3% to $1,189.1 million driven by a 13% rise in comps. Bath & Body Works total sales were up 6.5% to $467.5 million with a 6% increase in comps.
Despite a 4.5% increase in cost of goods sold, buying and occupancy, gross profit for the quarter surged 26.9% to $714.3 million, aided by an increase in the top-line, whereas gross margin expanded 430 basis points to 36%. Operating income soared to $149.1 million from $58.9 million in the prior-year quarter, whereas operating margin expanded 420 basis points to 7.5%.
Management Guidance
The third quarter results have made Limited Brands more optimistic. Consequently, management forecasted fiscal year 2010 earnings between $1.82 and $1.97 per share, up from $1.68 and $1.83 as previously anticipated. The company now expects fourth-quarter 2010 earnings between $1.02 and $1.17.
Following an improved outlook, a positive sentiment may be palpable among the analysts covering the stock, and we could witness a rise in the Zacks Consensus Estimate in the coming days. The current Zacks Consensus Estimate of $1.17 for fourth-quarter and $1.93 for fiscal 2010 dovetail with the company’s current guidance.
Management now expects comps to be up in the low single-digits in the fourth quarter and at a mid-single digit in fiscal 2010.
Other Financial Details
Capital expenditures for the quarter were $86.8 million. Management anticipates capital expenditures of $275 million for fiscal 2010, and expects to generate free cash flows of $800 million.
Limited Brands, which currently operates 2,988 stores, announced a special dividend of $3 per share payable on December 21, 2010 to shareholders’ of record as on December 7, 2010. The company’s board also authorized a share repurchase program of $200 million, which includes $53 million remaining under its previous $200 million authorization.
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 third-quarter 2010 stronger-than-expected 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 have 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 unfavorable macro-economic factors influencing consumer spending patterns still remain matter of concerns.
Currently, we have a Neutral rating on Limited Brands for the long term. The Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, also correlates with our long-term view.
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