L Brands (LB) Tops Q1 Earnings, Stock Down On Tepid View

L Brands, Inc. (NYSE:LB) came up with the third straight quarter of positive earnings surprise with first-quarter fiscal 2016 results. The company posted quarterly earnings of 59 cents per share that beat the Zacks Consensus Estimate of 55 cents but declined 3.3% from 61 cents earned in the year-ago quarter. The year-over-year decline in adjusted earnings were primarily due to the negative impact of foreign currency headwinds, incremental interest expenses and pre-opening costs for the flagship Victoria’s secret store. Foreign currency headwinds impacted the bottom line by 7 cents a share.

Despite the earnings beat, the company’s shares declined 4.8% in after-hour trading session yesterday as investors were disappointed after the Columbus, OH-based company’s tepid earnings per share guidance for fiscal 2016.

This specialty retailer of women’s intimate and other apparel reported net sales of $2,613.8 million, up 4% from $2,511.9 million in the prior-year quarter. However, the figure missed the Zacks Consensus Estimate of $2,617 million. L Brands recorded comparable sales (including direct sales) growth of 3% during the reported quarter. Store only comps grew 2%. We believe that the company’s operational efficiencies, together with its new and innovative collections, boosted sales.

Sales at Victoria’s Secret Stores increased 2.6% to $1,381.2 million, while Victoria's Secret Direct sales grew 6.3% to $359.7 million. Total Victoria’s Secret sales climbed 3.4% to $1,740.9 million, while comparable sales inched up 2%. Bath & Body Works’ total sales jumped 7.6% to $660.2 million, with a 6% rise in comparable sales. Victoria’s Secret and Bath & Body Works International’s sales were up 4% to $95.2 million. Other revenues decreased 4.6% to $117.5 million.

Adjusted gross profit dipped 0.2% to $1,054 million, while gross margin contracted 170 basis points (bps) to 40.3%. Decline in merchandise margin rate as well as increase in buying and occupancy expenditure deleverage led to the downside. Adjusted operating income decreased 4% to $357.9 million, while the operating margin fell 110 bps to 13.7%. Decline in operating income was mostly due to Victoria’s Secret and International Segments.

Store Update

During reported quarter, L Brands opened five Victoria’s Secret stores in total and closed two outlets, thereby taking the count to 1,167 stores. During the period, four Bath & Body Works stores were opened but one was closed, which took the count to 1,675 stores. Also, one PINK U.K. store was opened, thus resulting in a total of three stores. The company also opened one Victoria’s Secret Beauty and Accessories store and acquired 26 stores. During the quarter, one La Senza Canadian store was closed, which resulted in total count of 125 stores. The company had 12 Victoria’s Secret U.K. and 29 Henri Bendel stores at the end of the quarter. As of Jan 30, 2016, L Brands operated 3,038 stores.

Total franchised stores as of Apr 30, 2016, were 724 that comprised 356 Victoria's Secret Beauty & Accessories, 17 Victoria’s Secret, three Pink, 131 Bath & Body Works, and 217 La Senza stores.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $1,267.5 million. The long-term debt increased to $5,718.5 million from $4,718.7 million in the year-ago period. On the other hand, shareholders’ deficit was $1,085.9 million.

During the quarter, management incurred capital expenditures of $187.2 million, and now projects the same in the range of $900 million to $1 billion for fiscal 2016. The company expects to generate free cash flow in the band of $600–$700 million during the fiscal year.

In the quarter under review, the company repurchased 3.1 million shares for $260.2 million. At the end of the quarter, the company had $239.8 million remaining under the current share buyback program of $500 million.

Guidance

Management now projects earnings in the band of $3.60–$3.80 per share for fiscal 2016, down sharply from the previous guidance of $3.90–$4.10 per share. The steep decline in earnings estimate was primarily due to the impact of nearly 20 cents related to the previous announcement of strategic changes and decline in sales trends at Victoria’s Secret. The company’s earnings will also be affected by nearly 10 cents due to the increase in costs related to the company’s plan to develop a wholly owned model from franchise-based operating model in China.

On the other hand, the company expects the fiscal second-quarter earnings in the range of 50 cents to 60 cents.

Analysts polled by Zacks anticipate earnings per share between 67 cents and $4.01 for the second quarter and fiscal 2016, respectively. Going forward, the Zacks Consensus Estimate could witness a downward revision, as analysts might adjust their estimates in line with management’s projection.

L Brands now expects comparable sales to decline low to mid-single digits in May and flat to down low-single digit in the second quarter. The company expects comparable sales to remain flat year over year and anticipates total sales to increase about 2 points higher than comps on account of square footage growth of approximately 4%.

Both for second quarter and fiscal 2016, gross margin is expected to deteriorate year over year.

Zacks Rank

Currently, L Brands carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail sector include Abercrombie & Fitch Co. (NYSE:ANF) , The Children's Place, Inc. (NASDAQ:PLCE) and New York & Company Inc. (NYSE:NWY) , all holding a Zacks Rank #2 (Buy).