Limited Brands Beats, Raises Outlook

| About: L Brands, (LB)

Limited Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted better-than-expected third-quarter 2011 results on the heels of an improving sales environment witnessed across its Victoria's Secret and Bath and Body Works chains. The outperformance also prompted management to raise its fiscal 2011 earnings outlook.

The quarterly earnings of 25 cents a share beat the Zacks Consensus Estimate by a penny, and rose 39% from 18 cents earned in the prior-year quarter. The earnings also came ahead of management’s own guidance range of 22 cents to 24 cents a share.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. (NYSE:GPS) and Hanesbrands Inc. (NYSE:HBI), posted net sales of $2,173.4 million that climbed 10% from the prior-year quarter, and comfortably beat the Zacks Consensus Estimate of $2,163 million.

Comparable-store sales (comps) for the quarter jumped 9% compared with 10% registered in the year-earlier quarter. Comps rose 11% both in August and September, and 6% in October. The 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 12% to $941.6 million, whereas comps were up 13%. Victoria's Secret Direct sales jumped 8% to $276.9 million. La Senza sales for the quarter were $92.9 million, whereas comps dropped 4%. Total Victoria Secret sales grew 10% to $1,311.4 million driven by an 11% rise in comps. Bath & Body Works & The White Barn Candle Co.’s total sales were up 8% to $503.7 million with a 9% increase in comps.

Despite a 9% increase in cost of goods sold, buying and occupancy, gross profit for the quarter surged 10% to $785.3 million, powered by a growth in the top line, whereas gross margin expanded 10 basis points to 36.1%. Operating income soared 25% to $186.1 million, whereas operating margin expanded 100 basis points to 8.6%.

Other Financial Details

Limited Brands, which operates 2,959 stores, ended the quarter with cash and cash equivalents of $498.2 million, long-term debt of 3,535.7 million and shareholders’ equity of $521.4 million.

Capital expenditures for the quarter were $173 million. Management anticipates capital expenditures to be approximately $425 million in fiscal 2011, and expects to generate free cash flows of about $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 announced a $250 million share buyback program, after the $500 million share repurchase authorization was exhausted.The company also declared a quarterly dividend of 20 cents a share to be paid on December 9, 2011, to shareholders of record as on November 25, 2011.

Strolling Through Guidance

Management now expects the fourth quarter earnings in the range of $1.28 to $1.43 and fiscal 2011 earnings between $2.38 and $2.53 per share. Earlier, Limited Brands had projected fiscal 2011 earnings between $2.35 and $2.50 per share.

The current Zacks Consensus Estimates are $1.41 for the fourth quarter and $2.48 for fiscal 2011, both of which lie near the high end of the guidance range.

Limited Brands now expects comparable-store sales to rise in the low single digits in the month of November and in the fourth quarter, and in the mid-to-high single-digit range for fiscal 2011.

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.

Counting the pulse of the economy, we believe that consumers will remain cautious on their spending this holiday season, and thereby we could see more competitive pricing and new products to attract shoppers. We believe that retailing companies will leave no stone unturned to win the hearts of bargain hunters and it definitely remains a wait-and-watch story as to who emerges successful in wooing consumers in this distressed economy.

However, the past trends witnessed in comparable-store sales despite lingering economic woes, and the better-than-expected results, inspire optimism on Limited Brands.

Currently, we have a long-term ‘Outperform’ recommendation on the stock. Limited Brands holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

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