It has been about a month since the last earnings report for L Brands (LB). Shares have lost about 1.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is L Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
L Brands Q1 Earnings Top, Bath & Body Works Aid Results
L Brands, Inc. reported better-than-expected first-quarter results that also prompted management to lift the lower-end of fiscal 2019 earnings view range. We note that impressive performance at Bath & Body Works brand aided the quarterly results. However, results remained dismal in the company’s Victoria’s Secret business, which has been battling competition and consumers’ changing preferences for quite some time.
This specialty retailer of women's intimate and other apparel, beauty and personal care products now envisions fiscal 2019 earnings in the band of $2.30-$2.60 compared with $2.20-$2.60 previously anticipated. Management now projects second-quarter earnings per share between 15 cents and 20 cents.
Detailed Quarterly Discussion
L Brands reported quarterly earnings of 14 cents a share that outpaced the Zacks Consensus Estimate of a break-even figure. This was the sixth consecutive quarter that this Zacks Rank #3 (Hold) company has registered positive earnings surprise. However, the bottom line declined 18% from the year-ago period. We note that higher costs of goods sold, buying and occupancy, and increased interest expenses hurt the quarterly earnings.
Net sales came in at $2,628.8 million, up marginally from $2,625.8 million reported in the prior-year period. The top-line figure also surpassed the Zacks Consensus Estimate $2,557 million. However, comparable sales were flat compared with growth of 3% witnessed in the prior-year quarter.
Total Victoria’s Secret sales dropped 5% to $1,510.9 million. Comparable sales fell 5%, while comparable store sales tumbled 7%. Comps were down low-single digits in the lingerie business, while the metric declined in the low-double digit range at PINK. Victoria’s Secret Beauty comps were about flat. Further, total digital sales registered an increase of 2%.
On the contrary, Bath & Body Works (BBW) delivered a solid show and surpassed management’s expectations. Total sales grew 15% to $870.7 million, with 13% rise in comparable sales and 7% improvement in comparable store sales.
Sales were fueled by robust performance in the three key categories, including body care, home fragrance and soaps & sanitizers. BBW direct channel remained sturdy, with sales up 40%. Further, merchandise margin rose on the back of lower promotions.
We note that L Brands’ International sales came in at $135 million, almost flat year over year. The increase in revenue and reduction in the China operating loss was offset by fall in partner businesses.
L Brands’ gross profit fell 1% to roughly $934 million during the quarter. We note that gross margin contracted 40 bps to 35.5% on account of lower merchandise margin rate, which was partly mitigated by buying and occupancy expense leverage. Operating income declined to $153.3 million from $154.8 million in the year-ago quarter, while operating margin shriveled 10 bps to 5.8%.
SG&A expense fell 1% to $780.7 million, while as a percentage of net sales, the same leveraged by 30 bps due to fall in marketing expense at Victoria’s Secret unit.
During the quarter, L Brands opened one Victoria’s Secret store and shuttered 35, taking the total count to 1,109. In the same period, 14 Bath & Body Works stores were inaugurated and three were closed, which took the count to 1,732 stores. At the end of the quarter, the company operated 79 international stores. As of May 4, 2019, L Brands operated 2,920 stores.
Total non company-owned stores (as of May 4, 2019) were 680, including 217 Victoria’s Secret Beauty & Accessories, 50 Victoria’s Secret, nine Pink and 230 Bath & Body Works stores. Further, non company-owned stores comprised 161 and 13 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 $1,145.6 million, up from the prior-year quarter’s figure of $1,031.5 million. Long-term debt increased to $5,748.7 million from nearly $5,718.6 million a year ago. Shareholders’ deficit came in at $897.9 million. Management incurred capital expenditures of $123.3 million during the quarter under review.
For fiscal 2019, the company projects capital expenditures to be $575-$600 million. It anticipates generating free cash flow of approximately $700 million during the same period.
Management expects Bath & Body Works brand to experience another solid year and remains committed to improve Victoria’s Secret performance by staying customer-focused, enriching assortments, and enhancing store and online experiences. 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.
L Brands expects second quarter comps to be about flat. Further, gross margin is expected to contract year over year owing to lower merchandise margin rate. SG&A expense rate is anticipated to escalate on account of flat sales.
For fiscal 2019, the company anticipates comps to rise in low-single digits. Gross margin rate is likely to decrease year over year primarily due to lower merchandise margins. SG&A costs are expected to increase year over year, stemming from higher wage rate and expense associated to technology initiatives undertaken.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -21.51% due to these changes.
Currently, L Brands has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, L Brands has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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