We have maintained our Neutral recommendation on L Brands, Inc. (LB), the specialty retailer of women’s intimate and other apparel, with a target price of $64.00. The stock currently carries a Zacks Rank #3 (Hold).
We believe that Limited Brands’ sustained focus on cost containment, inventory management, merchandise, and speed-to-market initiatives have kept it afloat in a sluggish consumer environment. The company’s foray into international markets is likely to provide long-term growth opportunities.
Limited Brands commands a market leading position in the lingerie, personal care and beauty segments. We believe that the company’s innovation in merchandise and exclusive assortments remain popular among consumers and sets it apart from peers.
The company’s strength was well evident from its third-quarter fiscal 2013 results, wherein earnings of 31 cents a share came ahead of the Zacks Consensus Estimate of 28 cents and rose 19% from the prior-year period. The consumers, who cut back on their discretionary spending during the recession, are now gradually opening their wallets. Retailers are spending more on promotions and coming up with lucrative discounts to drive traffic.
Limited Brands now forecasts earnings in the range of $1.67 to $1.82 for the fourth quarter and between $3.07 and $3.22 per share for fiscal 2013.
However, in the near-term, margins are likely to remain muted on account of probable pressure on merchandise margins. Going forward, management expects gross margins to shrivel year over year both for the fourth quarter and fiscal 2013. Moreover, stiff competition and erratic consumer behavior still remain major causes of concern.
Given the pros and cons, risk and reward fairly balance each other.
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