L Brands Beats On Profits, But Provides Weak Outlook

In its recent Q4 fiscal 2014 earnings release, L Brands (NYSE:LB) was yet again ahead of the Wall Street estimates. The company said that its profits increased 15% from $489.6 million or $1.65 per share in Q4 fiscal 2013 to $564.8 million or $1.89 per share in the fourth quarter of the recently concluded fiscal year. Analysts polled by Thomson Reuters expected L Brands’ EPS to be around $1.80. It is not surprising that the parent company of Victoria’s Secret and Bath & Body Works has so easily trumped market expectations. It has been consistent with its growth for a long time now, thanks to its strong footing in the niche intimates and personal care markets.

However, despite the 7% rise in revenues and earnings beat, L Brands’ shares fell slightly in after hours, as its Q1 and fiscal 2015 guidance fell short of analysts’ estimates. For the first quarter of fiscal 2015, the company projected its earnings per share at $0.50-$0.55, while the consensus estimate was at $0.62. For the full year, L Brands expects to earn $3.45-$3.65 per share, which is well below the figure of $3.82 projected by analysts polled by Thomson Reuters.

Our price estimate for L Brands is at $70, implying a discount of close to 20% to the market price. We are in the process of updating the model in light of the recent earnings release.
See our complete analysis for L Brands

How L Brands’ Profits Improved

Just like several other occasions, L Brands was not short of customers who were willing to buy products at minimal discounts during the holiday season. This is evident from the fact that its gross margins improved to 45.1% in Q4 fiscal 2014 from 43% in the same quarter of fiscal 2013. Such substantial improvement in gross margins in the current retail environment is a rare occurrence, as buyers across the industry are continually searching for value for money products.

L Brands’ operating expenses as a percentage of revenues increased to 21.6% from 20.4% from the year ago period, which had a negative impact on its income growth. Still, the company’s operating margins improved to 23.5% from 22.6%. Moreover, a two percentage point fall in tax rate was able to boost the retailer’s net profit margin. It settled at 13.9% for Q4 fiscal 2014, up from 12.8% in Q4 fiscal 2013. These figures indicate that while L Brands has been extremely successful in operating with fewer discounts and markdowns, it has not been as efficient in managing its expenses despite having decent operating leverage.

What Fiscal 2015 Guidance Means

L Brands’ guidance of $3.45-$3.65 reflects a year over year change of -1.4% to +4.3%. The outlook is very disappointing by the retailer’s standards, considering that it recorded 15% year over year growth in its fiscal 2014 earnings per share. Consensus estimate of $3.85 was not too optimistic as it reflected just 10% improvement, which is not too difficult to achieve for a company like L Brands.

The retailer’s guidance suggests that fiscal 2015 will not be too different from fiscal 2014. It expects low-single digit improvement in comparable sales for the current year, while they improved 4% last year. Expansion plans are somewhat similar to last year, and Gross margins and SG&A rate are expected to remain flat. However, the company has mentioned that it expects to pay taxes at the rate of 37.5% in fiscal 2015, while tax-rate for fiscal 2014 was 35.8%. This appears to be the main reason behind L Brands’ disappointing guidance. We will get a better idea about the same after the company’s earnings call.

Since the company is holding its earnings call a day after the official earnings release, we will follow up the earnings note with an article focused on L Brands’ international and online performance.

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