L Brands’ Growth Remains Steady; Guides Moderate Improvement For 2015
The parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB) recently reported its Q1 fiscal 2015 results. The retailer said its adjusted earnings per share increased 15% to $0.61 from $0.53 in the year ago period, which was interestingly just ahead of its recently revised guidance of $0.58-$0.60. L Brands’ net sales increased 5% year over year to $2.512 billion, with a similar increase in comparable sales. The retailer’s net sales growth wasn’t ahead of its comparable sales growth despite continued expansion, because negative currency headwinds had a negative impact of one percentage point on revenue growth. On the profitability side, L Brands gross margins expanded 90 basis points as the company successfully scaled back on promotional activities. Its SG&A as percentage of revenues deleveraged 20 basis points due to higher store selling expenses, but overall operating income increased 11% and margins rose 70 basis points. [1]
While L Brands’ performance during the first quarter was good across the board, its guidance is a little disappointing, though marginally better than its earlier guidance. Considering that Victoria’s Secret and Bath & Body Works are the dominating brands in their respective fields and have substantial room for growth, comparable sales growth forecast appears somewhat bleak. The company expects second quarter and full year comparable sales to increase in low-single digit, with net sales growth just a little ahead. While gross margins have improved in Q1, L Brands believes that they will be flat year over year for the full year 2015.
Our price estimate for L Brands is at $89, which is roughly inline with the current 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 expects only low-single digit improvement in comparable sales for its Victoria’s Secret and Bath & Body Works brands. While both of them remain prime choices in their respective industries, slow expected growth can be partially attributed to strengthening dollar, exit from non-core apparel and heavy discounting of non-go-forward categories. Overall sales growth however, is likely to remain a point ahead of comparable sales growth due to a higher number of stores operational this year as compared to last year. By the end of the year 2015, L Brands plans to increase Victoria’s Secret‘s square footage by 4% with the addition of 25 new stores and the expansion of existing stores. For Bath & Body Works, it is planning to increase square footage by 3% with 24 new stores and 83 remodeled stores. This will bring the company’s net square foot addition to 3.5%. L Brands expects gross margins to remain flat because they have already improved considerably over the past year, and given the prevailing market conditions, significant improvement from this level won’t be too easy.
L Brands had guided its 2015 EPS to $3.45-$3.65 at the end of 2014, but it has now raised this marginally to $3.50-$3.70, which reflects a year over year change of -1.3% to +4.4%. 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. The retailer’s guidance suggests that fiscal 2015 will not be too different from fiscal 2014. 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, with partial contributions from currency effects and discontinued apparel. Nevertheless, it still remains among the strongest players in industry, and isn’t short on long term growth drivers.
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Notes:- L Brands’ Q1 fiscal 2015 earnings transcript, May 20 2015 [↩]