L Brands Beats On Profit, But Lowers Its 2014 Outlook

May 23rd, 2014 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

After a rough holiday quarter, the parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB), bounced back with 2% growth in comparable sales and 5% rise in revenues. With its dominance in the intimates and personal-care markets, the retailer was able to record modest growth even as economic uncertainty troubled U.S. buyers and demand for apparel remained weak. What’s also pleasing to see is that L Brands’ net income jumped 10% to $156.9 million or 53 cents per share, which was slightly better than analysts’ estimate of 52 cents per share. [1]

Despite its compelling performance, L Brands lowered its 2014 EPS outlook slightly on account of discontinuation of certain product lines. The company narrowed  its EPS guidance range from $3.00-$3.20 to $3.00-$3.15. [1] However, compared to other apparel retailers in the U.S., L Brands’ outlook still looks good and it appears to be well equipped to sustain its steady growth momentum. Barring Q4, when late Thanksgiving and relentless weather softened L Brands’ results, the company has grown consistently with its strong product portfolio and appealing marketing campaigns.

Our price estimate for L Brands is at $63.95, implying a premium of about 10% to the market price. However, we are in the process of updating our model in light of the recent earning release.

Relevant Articles
  1. What’s Next For Gap Stock?
  2. What’s Driving Altria Stock Higher?
  3. What’s Next For HIMS Stock?
  4. Buy, Sell, Or Hold Deere Stock?
  5. Is The Worst Over For Super Micro Stock?
  6. Pick Honeywell Over 3M Stock?

See our complete analysis for L Brands

Strong Intimates Sales Helped Victoria’s Secret Despite A Lull In Apparel

Presently, the U.S. apparel industry is going through a rough phase due to the sluggish economic environment and change in buyer preferences. A number of retailers such as American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF) have been striving for positive growth. Even stronger players such as Urban Outfitters (NASDAQ:URBN) and Gap Inc (NYSE:GPS) have witnessed a slowdown in their growth in recent quarters on account of weak consumer spending. L Brands has also felt the impact of apparel industry weakness, which is evident from Victoria’s Secret’s flat direct-to-consumer sales in Q1 fiscal 2014 on top of 6% decline in the same quarter last year. [1] The channel’s dismal performance clearly indicates that the brand is struggling to sell its apparel products (clothing other than intimates) despite a strong image in the U.S.

Despite a slight decline in its direct sales, Victoria’s Secret managed to post 2% comparable store sales growth in Q1 fiscal 2014, primarily driven by healthy sales of intimates. Victoria’s Secret is the strongest brand in the niche intimates market and it has exploited its dominance to good effect. Customer response to its lingerie and PINK brand has been very good, and its new lines such as Body by Victoria bras, New Victoria fragrance, PINK wear everywhere bra and fabulous bra have been well received. L Brands has further solidified customer sentiment towards the brand with various Victoria’s Secret fashion shows that have a worldwide following. Last year’s fashion show featured special performances from Taylor Swift, Fall Out Boy and Neon Jungle. We believe that the brand’s strength in intimates will continue to drive its results and its apparel sales will eventually pick up as L Brands revamps their design and marketing.

New EPS Outlook Doesn’t Look Too Bad

Following its steady Q1 fiscal 2014 results, L Brands slashed its outlook for 2014 from $3.00-$3.20 to $3.00-$3.15, citing discontinuation of certain product categories as the reason. The company stated that it is exiting from some non-core product categories in Victoria’s Secret direct and beauty business that will allow it to focus on more promising product lines. Since the new EPS guidance mainly incorporates fewer revenues from the discontinued categories, it does not reflect any underlying weakness. In fact, it appears that the company has actually raised its guidance. L Brands mentioned in its earnings release that product discontinuation will have a negative impact of $0.10-$0.12 on its earnings per share. But the company has lowered only the top end of its guidance by just $0.05 per share. This means, that L Brands now expects its organic growth to be better than what it expected in its previous forecast. [1] Therefore, we believe that fiscal 2014 will be a steady year for the company.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Notes:
  1. L Brands Reports First Quarter 2014 Earnings, L Brands, May 21 2014 [↩] [↩] [↩] [↩]