L Brands Beats On Profits And Raises Full Year Guidance
The parent company of Victoria’s Secrets and Bath & Body Works, L Brands (NYSE:LB), continues to perform very well in an environment that has been tough for most apparel retailers in the U.S. The company reported modest growth in its comparable store sales and profits in the second quarter of 2014, while many retail chains struggled to match their previous year’s levels. L Brands’ profits increased by 5% to $188.4 million and its earnings per share came in at $0.63, which was a penny ahead of the consensus estimate. Interestingly, the retailer was able to beat its own EPS guidance of $0.57-$0.62. [1]
L Brands’ overall sales growth also topped estimates as its revenues increased 6% to $2.68 billion, which was $50 million ahead of the street estimates. The retailer’s comparable store sales increased by 3% with similar growth across Victoria’s Secret and Bath & Body Works. However, gross margins narrowed slightly to 39% in Q2 2014 from 39.3% in the same quarter last year, due to the highly promotional environment in the U.S.
Following these results, the company raised its full year EPS outlook slightly, which has been a rare occurrence in the U.S. retail market. L Brands now expects its full year EPS to be around $3.03-$3.18, up 3 cents from its previous guidance. It may be worth noting that the retailer had lowered its full year EPS guidance after its Q1 results as it expected discontinuation of certain categories to have a negative impact. However, the new outlook suggests that sales in other categories are going strong, which is good news for the company.
Our price estimate for L Brands is at $63.95, which is just ahead of the market price. However, we are in the process of updating our model in light of the recent earnings release.
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Why Guidance Revision is More Promising than it Looks
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 company’s new EPS guidance (after Q1) incorporated fewer revenues from the discontinued categories, it did not reflect any underlying weakness. In fact, it appeared that the company had actually raised its guidance. L Brands mentioned in its Q1 earnings release that product discontinuation will have a negative impact of $0.10-$0.12 on its full year earnings per share. But the company had lowered only the top end of its guidance by just $0.05 per share. Interestingly, after the second quarter results, L Brands raised the lower and higher end of its guidance by $0.03, and stated that its full year EPS still includes the $0.10-$0.12 negative impact. [2] This means, that L Brands now expects its organic growth to be better than what it expected in its previous forecast.
Revenue Growth will Remain Steady
L Brands’ Q1 and Q2 results imply that it has gained significant momentum after its slump in the holiday quarter, when relentless winter weather and low demand for apparel subdued its results. During the first quarter, the retailer’s sales increased by 5%, driven by 2% growth in comparable store sales and expansion of new stores. The company’s revenues increased by 6% in Q2 2014 with 3% rise in comparable store sales. In both the quarters, L Brands’ sales growth was three percentage points ahead of its comparable store sales growth.
In its Q2 earnings call, the retailer projected low-single digit growth in its comparable store sales for the full year. It expects revenue growth to stay two percentage points ahead on account of domestic as well as international expansion. [3] For 2014, L Brands has 110-120 international stores planned for Victoria’s Secrets and 20-30 international stores for Bath & Body Works. In the U.S., the company plans to add 13 Victoria’s Secret stores, 33 PINK stores and 14 Bath & Body Works stores during the year.
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Notes:- L Brands Books Higher Profits, Sales, The Wall Street Journal, Aug 20 2014 [↩]
- L Brands Reports Second Quarter 2014 Earnings, L Brands, Aug 20 2014 [↩]
- L Brands’ Q2 fiscal 2014 earnings transcript, Aug 20 2014 [↩]