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L Brands (LB) Q3 Earnings Meet, Victoria's Secret a Drag

Zacks Equity Research

L Brands, Inc.’s LB third-quarter fiscal 2019 earnings met the Zacks Consensus Estimate but net sales fell short of the same for the second straight quarter. Both the top and the bottom lines continued to decline year over year.

We note that the results of the company’s Victoria’s Secret business, which has been battling competition and consumers’ changing preferences for quite some time now, remained dismal. However, impressive performance at Bath & Body Works brand did provide some cushion.

Notably, the bottom-line figure came within management’s projected range of a loss of 5 cents to earnings of 5 cents. Further, the company’s fourth-quarter earnings guidance is above analysts’ expectations.

Consequently, shares of this specialty retailer of women's intimate and other apparel, beauty and personal care products rose more than 3% during the after-market trading hours on Nov 20.

L Brands envisions fourth-quarter earnings to be $2.00 per share, which is above the current Zacks Consensus Estimate of $1.94. But the figure indicates a decline of 6.5% from the year-ago reported number. For the fiscal year, the company now forecast earnings of about $2.40 compared with prior view of $2.30-$2.60 per share. Although the new estimate is above the current consensus mark of $2.37, it suggests a decline from $2.82 in fiscal 2018.

L Brands, Inc. Price, Consensus and EPS Surprise


L Brands, Inc. Price, Consensus and EPS Surprise

Meanwhile, shares of this Zacks Rank #3 (Hold) have slid 22% against the industry’s growth of 7.6% in the past three months.

Detailed Quarterly Discussion

L Brands reported earnings of 2 cents a share that came in line with the Zacks Consensus Estimate. However, the bottom line declined sharply 16 cents reported in the year-ago period. We note that lower net sales hurt the bottom line.

Net sales came in at $2,676.7 million, down 4% from $2,774.9 million reported in the prior-year period. The top-line figure also missed the Zacks Consensus Estimate $2,689 million. Comparable sales declined 2% against 4% growth witnessed in the prior-year quarter.

Total Victoria’s Secret sales dropped 8% to $1,412.2 million. Comparable sales fell 7% while comparable store sales tumbled 8% owing to lower traffic and average unit retails. Further, total digital sales registered a decline of 6%. Comps were down low-double digit in the lingerie business, while the metric declined in the mid-single digit range at PINK. Victoria’s Secret Beauty comps improved in the low-single digit range. We note that the segment’s merchandise margin rate declined.

Meanwhile, Bath & Body Works put up a stellar show. Total sales grew 11% to $1,064.1 million, with 9% rise in comparable sales and 5% improvement in comparable store sales. Management stated that the segment benefited from favorable customer response for merchandise assortment. Bath & Body Works direct channel remained sturdy, with sales up 30%. Further, merchandise margin rate declined on account of supply chain pressures, including increased transportation and labor costs and tariffs.

We note that L Brands’ International sales came in at $133.4 million, flat year over year. Revenues and operating income grew at its partner business driven by Bath & Body Works. In the U.K., revenues fell due to continued negative comp performance. Revenues in Greater China also decreased owing to the unrest in Hong Kong.

L Brands’ gross profit declined 6% to $957.6 million during the quarter. We note that gross margin contracted 110 bps to 35.8% on account of buying and occupancy expense deleverage. The merchandise margin rate was about flat. Operating income plunged 38% from the year-ago period to $96.3 million, while operating margin shriveled 200 bps to 3.6%.

SG&A expenses fell 1% to $861.3 million due to the absence of La Senza and Henri Bendel businesses. As a percentage of net sales, the same increased 90 bps to 32.2%.

Store Update

As of Nov 2, 2019, company-owned stores were 2,944 including 1,111 Victoria’s Secret stores, 1,744 Bath & Body Works, 21 Victoria’s Secret U.K./Ireland, 5 PINK U.K., 42 Victoria’s Secret Beauty and Accessories and 21 Victoria’s Secret China.

Total non company-owned stores were 700, including 216 Victoria’s Secret Beauty & Accessories, 62 Victoria’s Secret, nine Pink and 240 Bath & Body Works stores. Further, non company-owned stores comprised 158 and 15 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

Other Financial Details

L Brands ended the quarter with cash and cash equivalents of $340 million, down from the prior-year quarter’s figure of $348.4 million. Long-term debt decreased to $5,477.2 million from $5,814.3 million a year ago. Shareholders’ deficit was $1,238.2 million. Management incurred capital expenditures of $148 million in the quarter under review.

For fiscal 2019, the company projects capital expenditures to be about $500 million. It anticipates free cash flow of approximately $750 million during the same period.


Bath & Body Works brand is likely to experience another solid year. However, management hinted that occupancy costs due to real estate initiative and direct fulfillment and sourcing costs will put pressure on gross margin in the final quarter and the near future. At Bath & Body Works segment, management hinted at continuing its investment in the White Barn concept in 2019. The company has chalked out about 200 White Barn projects for 2019. Looking ahead, the company remains committed to improve Victoria’s Secret performance by staying customer-focused, enriching assortments, and enhancing store and online experiences.

Management anticipates Victoria’s Secret merchandise margin dollar percentage decline in the high-single digit range during the final quarter of fiscal 2019.

L Brands expects fourth-quarter comps to be to be about flat. The change in total sales will be approximately 2 points lower than the comp result due to loss of La Senza and Henri Bendel sales, offset by square footage growth at Bath & Body Works.

Further, gross margin is expected to contract year over year owing to lower merchandise margin rate. SG&A expense rate is anticipated to be nearly flat.
For fiscal 2019, the company anticipates comps to be about flat to down marginally. Total sales are expected to increase approximately 2 points lower than comps on account of loss of La Senza and Henri Bendel sales. Gross margin rate is likely to decrease year over year primarily due to lower merchandise margin rate. SG&A costs are expected to be flat to down marginally, while SG&A rate is expected to be roughly flat.

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