L Brands (LB) Tops Q2 Earnings, Updates Views, Stock Gains

L Brands, Inc. (NYSE:LB) came up with the fourth straight quarter of positive earnings surprise, as it reported second-quarter fiscal 2016 results. The company posted quarterly earnings of 70 cents per share that beat the Zacks Consensus Estimate of 59 cents and also increased 2.9% from 68 cents earned in the year-ago quarter. Foreign currency headwinds impacted the bottom line by 6 cents a share.

L Brands’ sustained focus on cost containment, inventory management, merchandise, and speed-to-market initiatives has kept it afloat in a soft consumer environment. Following the results, the Columbus, OH-based company’s shares gained 3% during the after hour trading session on Aug 17.

This specialty retailer of women’s intimate and other apparel reported net sales of $2,889.7 million, up 5% from $2,765.2 million in the prior-year quarter. The figure also surpassed the Zacks Consensus Estimate of $2,875 million. L Brands recorded comparable sales (including direct sales) growth of 3% during the reported quarter. Store only comps grew 1%. We believe that the company’s operational efficiencies, together with its new and innovative collections, boosted sales.

Sales at Victoria’s Secret Stores rose 2.2% to $1,469.1 million, while Victoria's Secret Direct sales grew 8% to $398.3 million. Total Victoria’s Secret sales climbed 3.4% to $1,867.4 million, while comparable sales inched up 2%. Bath & Body Works’ total sales jumped 7.1% to $801.4 million, with a 5% rise in comparable sales. Victoria’s Secret and Bath & Body Works International’s sales were up 12.4% to $99.70 million. Other revenues declined 0.6% to $121.2 million.

Adjusted gross profit dipped 0.1% to $1,112.9 million, while gross margin contracted 180 basis points to 38.5%. Decline in merchandise margin rate as well as increase in buying and occupancy expenditure deleverage led to the downside. Adjusted operating income inched up 1.3% to $408.2 million, while the operating margin fell 50 basis points to 14.1%. Decline in operating income was mostly due to Victoria’s Secret and International Segments.

Store Update

During first six months of fiscal 2016, L Brands opened 9 Victoria’s Secret stores in total and closed 4 outlets, thereby taking the total count to 1,169 stores. During the period, 16 Bath & Body Works stores were opened but 3 were closed, which took the total count to 1,685 stores. Also, one PINK U.K. store was opened, thus resulting in a total of 3 of its stores. The company also opened 2 Victoria’s Secret Beauty and Accessories store and acquired 26 such stores. During the quarter, 1 La Senza Canadian store was closed resulting in total count of 125 such stores. The company had 13 Victoria’s Secret U.K. and 29 Henri Bendel at the end of the quarter. As of Jul 30, 2016, L Brands operated 3,052 of its stores.

Total franchised stores as of Jul 30, 2016 were 740 that comprised 365 Victoria's Secret Beauty & Accessories, 18 Victoria’s Secret, 4 Pink, 140 Bath & Body Works, and 213 La Senza stores.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $1,272.7 million. The long-term debt increased to $5,706.9 million from $4,719.7 million in the year-ago period. On the other hand, shareholders’ deficit stands at $1,129.2 million.

During the quarter, management incurred capital expenditures of $310 million, and now projects the same in the range of $950 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 1.8 million shares for $127.8 million. At the end of the quarter, the company had $112 million remaining under the current share buyback program of $500 million.

Guidance

Management now projects earnings in the band of $3.70–$3.85 per share for fiscal 2016, up from the previous guidance of $3.60–$3.80. On the other hand, the company expects the fiscal third-quarter earnings in the range of 40 cents to 45 cents.

Analysts polled by Zacks anticipate earnings per share of 47 cents and $3.72 for the third quarter and fiscal 2016, respectively.

L Brands now expects comparable sales in the third quarter to be approximately flat year over year. However, the company expects comps to decline in the third quarter in comparison to that in the second quarter. For fiscal 2016, the company expects comparable sales to remain flat year over year or increase slightly, and anticipates total sales to increase about 2 points higher than comps on account of square footage growth.

Both for third 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 Nordstrom Inc. (NYSE:JWN) , The Children's Place, Inc. (NASDAQ:PLCE) and DSW Inc. (NYSE:DSW) , all holding a Zacks Rank #2 (Buy).