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Limited Brands Beats by a Penny

Zacks Equity Research

Limited Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, recently posted first-quarter 2012 earnings of 41 cents a share that whiskered past the Zacks Consensus Estimate by a penny, and rose 5% from 40 cents earned in the prior-year quarter. Management had earlier projected quarterly earnings between 38 cents and 40 cents a share.

Let’s Dig Deep

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), posted net sales of $2,153.8 million that fell 3% from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $2,155 million. 

Limited Brands posted comparable-store sales growth of 7% during the first quarter of 2012 compared with 7% in the previous quarter and 15% in the prior-year quarter.Comps rose 8% both in February and March, and 6% in April. This indicates that consumers, who cut back their discretionary spending during the recession, are now gradually opening their wallets.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 10% to $1,088 million, whereas comps were up 9%. Victoria's Secret Direct sales jumped 4% to $382 million. However, comps at La Senza edged down 1%. Total Victoria Secret sales grew 8% to $1,470 million driven by a 9% rise in comps. Bath & Body Works & The White Barn Candle Co.’s total sales were up 5% to $505 million, with a 6% increase in comps.     

Gross profit for the quarter rose 7% to $902 million, aided by a 9% decline in cost of goods sold, buying and occupancy, whereas gross margin expanded 390 basis points to 41.9%. Operating income jumped 10% to $293.2 million, whereas operating margin increased 160 basis points to 13.6%.

Other Financial Details

Limited Brands, which operates 2,899 stores, ended the quarter with cash and cash equivalents of $1,285.6 million and total long-term debt of 4,537.5 million

Capital expenditures for the quarter were $136.3 million. Management now anticipates capital expenditures between $575 million and $625 million for fiscal 2012, and expects to generate free cash flow in the range of $600 million to $700 million.

Strolling Through Guidance

Management now expects earnings in the range of 40 cents to 45 cents for the second quarter and between $2.63 and $2.83 per share for fiscal 2012. The current Zacks Consensus Estimates for the second and fiscal 2012 are 43 cents and $2.79, respectively.

Limited Brands now expects comparable-store sales to increase in the low-to-mid single digits in the second quarter and between 3% and 5% in fiscal 2012. For the month of May, management now expects comparable-store sales to rise in the low single-digit range.

Let’s Conclude

The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores have been performing well, and the company is also revamping its La Senza brand.

Limited Brands is keen to augment its retail footprint internationally by expanding aggressively in Canada and other international markets. However, stiff competition and erratic consumer behavior still remain concerns.

Currently, we have a long-term ‘Neutral’ recommendation on the stock. However, Limited Brands holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

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