Limited Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted better-than-expected fourth and fiscal 2011 results on the back of an improving sales environment witnessed across its Victoria’s Secret and Bath and Body Works chains.

The quarterly earnings of $1.50 per share beat the Zacks Consensus Estimate of $1.46, and rose 19% from $1.26 earned in the prior-year quarter. Management had earlier projected quarterly earnings on the high end of $1.42 to $1.46 per share range.

The company said that fiscal 2011 earnings registered a growth of 26% to $2.60 per share from $2.06 in the prior year, and came ahead of Zacks Consensus Estimate of $2.56.

On a reported basis, including one-time items, the quarterly earnings came in at $1.17 per share compared with $1.36 in the year-ago quarter. For fiscal 2011, the company posted earnings of $2.70 per share, up from $2.42 in 2010.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), posted net sales of $3,515.4 million that rose 2% from the prior-year quarter, and comfortably beat the Zacks Consensus Estimate of $3,490 million.

Sales climbed 8% to $10,364 million from $9,613.3 million in fiscal 2011, and outdid the Zacks Consensus Estimate of $10,344 million.

Limited Brands posted a comparable-store sales growth of 7% during the fourth quarter of 2011 compared with 9% in the previous quarter and 10% in the prior-year quarter.Comps rose 7% both in November and December, and 9% in January. Limited Brands’ comparable-store sales for fiscal 2011 climbed 10% compared with 9% in the prior year. This indicates that consumers, who cut back their discretionary spending during the recession, are now gradually opening their wallets.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 13% to $1,572 million, whereas comps were up 12%. Victoria’s Secret Direct sales jumped 3% to $519 million. However, comps at La Senza dropped 3%. Total Victoria Secret sales grew 10% to $2,091 million driven by a 12% rise in comps. Bath & Body Works & The White Barn Candle Co.’s total sales were up 4% at $1,128 million, with a 3% increase in comps.

Gross profit for the quarter rose 7% to $1,544.6 million, aided by a low-single digit growth in the top line and a 2% decline in cost of goods sold, buying and occupancy, whereas gross margin expanded 210 basis points to 43.9%. Operating income jumped 10% to $786.5 million, whereas operating margin increased 180 basis points to 22.4%.

Other Financial Details

Limited Brands, which operates 2,941 stores, ended the quarter with cash and cash equivalents of $935.1 million, long-term debt of 3,481 million and shareholders’ equity of $138.2 million.

Capital expenditures for the fourth quarter and fiscal 2011 were $90.9 million and $425.8 million, respectively. Management now anticipates capital expenditures between $575 million and $625 million in fiscal 2011, and expects to generate free cash flow in the range of $600 million to $700 million.

Limited Brands is also actively managing its cash flows, and returning much of its free cash via dividends and share repurchases. The company recently completed its $250 million share buyback authorization, and its board of directors went on to announce a new $500 million share repurchase program.

Strolling Through Guidance

Management now expects earnings for the first quarter in the range of 35 cents to 40 cents and for fiscal 2012 between $2.60 and $2.80 per share. The current Zacks Consensus Estimates are 44 cents for the first quarter and $2.92 for fiscal 2012, both of which lie ahead of management’s guidance range. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days with analysts revising their estimates to better align with management’s guidance.

Limited Brands now expects comparable-store sales to increase in the low-to-mid single digits in the first quarter and between 2% and 4% in fiscal 2012. For the month of February, comps are expected to rise in the mid-to-high single-digit range, up from low single digits forecasted earlier.

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 growth in new stores. Victoria’s Secret Stores have been performing well, and the company is also revamping its La Senza brand.

Limited Brands is keen to augment its retail footprint internationally by expanding aggressively in Canada and other international markets. However, stiff competition and erratic consumer behavior still remain concerns.

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

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