L Brands Beats On Revenues And Profits; Raises Full Year Guidance
L Brands (NYSE:LB) recently reported a 43% rise in its Q3 fiscal 2014 profits, which was much better than its recently increased guidance. The company’s profits for the quarter totaled at $131.8 million or $0.44 per share, 4 cents higher than its outlook of $0.40 per share. [1] It must be noted that L Brands had raised it EPS outlook for the third quarter from $0.38 to $0.40 at the beginning of the month. The parent company of Victoria’s Secret and Bath & Body Works, L Brands is one of the few apparel retailers in the U.S. market, that have performed well amid the edgy retail environment. Its strong market position and loyal customer base of affluent buyers have played a crucial role in ensuring steady revenue and profit growth. During the third quarter, L Brands’ revenues increased by 7%, while its comparable store sales went up by 5%. The company generated $2.319 billion in revenues during the quarter, which was marginally ahead of the market consensus of $2.315 billion. [2]
Our price estimate for L Brands is at $70, implying a discount of about 10% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
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L Brands’ overall gross profits increased 10.5% to $946.42 million with 130 basis points improvement in gross margin rate to 40.8%. The improvement in gross margins, despite the highly promotional environment in the U.S., is a pleasing development for the company. It indicates that Victoria’s Secret’s and Bath & Body Works’ seasonal collections have resonated very well with customers and that has allowed the brands to operate with fewer markdowns. L Brands’ operating margins improved 260 basis points to 12.3% during the quarter, implying that the retailer has seen some success for its cost control efforts. General, administrative and store occupancy expenses as percentage of revenues fell 118 basis points, as L Brands improved its expense management. [3]
Following its better-than-expected results in Q3, L Brands raised its full year guidance for the second time in the last two quarters. It now expects full year EPS to be in the range of $3.31-$3.21, up from its previous guidance of $3.18-$3.03. However, despite its earnings beat and a promising guidance, L Brands’ shares fell slightly by 1.2% in off-hours trading. This can be attributed to the fact that the retailer’s guidance for the fourth quarter fell short of analysts estimates. The company guided its Q4 EPS in the $1.71-$1.61 range, while analysts polled by Thomson Reuters were expecting the figure to be around $1.75. It appears that L Brands’ weaker-than-expected guidance for the most important quarter for the retail industry overshadowed its solid Q3 results and upbeat full year guidance.
On the expansion front, L Brands opened 29 company operated stores during the third quarter, and reduced its franchise store count by 23. Since the beginning of the year, the retailer has opened 41 Victoria’s Secret stores in the U.S. and has closed five stores at the same time. In international markets, the brand’s store count has gone up by 10. For Bath & Body Works North America, year-to-date store openings and closures stand at 23 and 12, respectively. [3]
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Notes:- L Brands’ Profit Rises 43%, Raises Outlook, The Wall Street Journal, Nov 19 2014 [↩]
- Consensus [↩]
- L Brands’ Reports Record Third Quarter 2014 Earnings, L Brands, Nov 19 2014 [↩] [↩]