Limited Brands: On the Way Back Up

| About: L Brands, (LB)

Limited Brands Inc.’s (LTD) sustained focus on cost containment, inventory control, merchandise initiatives and effective capital management has kept it afloat in a difficult consumer environment. The company ended fiscal year 2009 and posted better-than-expected earnings results.

The quarterly earnings of $1.01 per share outdid the Zacks Consensus Estimate of 98 cents and rose 49% from 68 cents delivered in the prior-year quarter. Net sales for the quarter rose 2% to $3,063.4 million, reflecting an increase of 1% in comparable-store sales.

Since the fourth-quarter 2009 earnings release on Feb. 24, 2010, the shares of Limited Brands, a specialty retailer of women’s intimate and other apparel, beauty and personal care products, have risen more than 9% as of late Monday trading.

Earnings Outlook & Zacks Consensus Trend

Limited Brands now expects first-quarter 2010 earnings in the range of 5 cents to 10 cents a share. Based on the company's performance and 2010 guidance, several analysts following the stock have raised their estimates.

The current Zacks Consensus Estimate of 9 cents a share, which lies at the high-end of the guidance range, has jumped 29% in the last 30 days, with 5 out of 18 analysts having raised their estimates substantially for first-quarter 2010. Limited Brands’ earnings surprise, when compared to the Zacks Consensus Estimate in the preceding four quarters, varies between 3% and 300%, with the average being 112%.

Limited Brands also forecasted fiscal year 2010 earnings between $1.40 and $1.60 per share. The current Zacks Consensus Estimate of $1.52, which also lies a bit closer to the upper-end of the guidance range, has increased 9% in the last 30 days, with 15 analysts raising their estimates.

Earnings are also on the rise for fiscal 2011 with 6 of the analysts following the stock raising their estimates over the last 30 days. Fiscal 2011 earnings estimates have gone up by 8% with the current Zacks Consensus Estimate being $1.74.

Bullishness Driving Estimates

Given the improving trends in comparable-store sales, record free cash flow generation in fiscal 2009, expansion in Canada, and operation of stores under the Travel and Tourism retail model, we remain confident that the company will achieve its guidance.

Limited Brands' February 2010 comparable-store sales rose 10%, following a 6% jump in January 2010 and a decline of 2% in December 2009. This reflects signs of improvement as consumers, who cut back their discretionary spending during the recession, are now starting to loosen their purse strings. The company now expects comparable-store sales to rise between 2%-4% in first quarter 2010.

In fiscal 2010, the company plans to open four Victoria’s Secret stores in Canada, five new Pink stores and 30 to 35 Bath & Body Works stores across the country. Under the travel retail concept, Limited Brands plans to open another 10 to 15 stores this year.

The company is in a constant process of revamping its La Senza brand both in Canada and beyond by improving product assortments, store operations and layout. The company also completed the closure of the La Senza Girl freestanding stores, which had been adversely affecting the company’s overall performance.

Bath & Body Works is also gaining strength, primarily driven by a rise in store transactions, enhancement in the direct channel business and growth from new and expanded stores.

Limited Brands is also actively managing its cash flows. During fiscal year 2009, the company generated a record free cash flow of $972 million. For fiscal 2010, the company expects free cash flow between $500 million to $600 million. The company’s strong liquidity will position it to drive future growth.

Currently, Limited Brands maintains a Zacks #1 Rank, which translates into a short-term "Strong Buy" recommendation. This also remains in line with our current long-term recommendation of Outperform on the stock.