L Brands (LB) Beats On Q4 Earnings, Issues FY18 Guidance

L Brands, Inc. (NYSE:LB) reported solid financial numbers in fourth-quarter fiscal 2017, wherein earnings of $2.11 per share outpaced the Zacks Consensus Estimate of $2.04, after reporting in-line earnings last quarter. The bottom line also improved 3.9% year over year. Moreover, revenues surpassed the consensus mark for the second straight time.

This specialty retailer of women’s intimate and other apparels reported net sales of $4,823.1 million, up 7.4% from the prior-year quarter. Also, the figure marginally came above the Zacks Consensus Estimate of $4,795 million. Furthermore, L Brands’ comparable sales (including direct sales) were up 2% in the quarter. However, store only comps decreased 2% year over year.

Sales at Victoria’s Secret Stores declined 1.2% to $2,038.3 million, while Victoria's Secret direct sales were up 19.9% to $630.6 million. Total Victoria’s Secret sales rose 3.1% to $2,668.9 million, while comparable sales fell 1%.

Bath & Body Works’ total sales were up 10.7% to $1,793.7 million, with a 6% rise in comparable sales. Strong performances by the company’s home fragrance assortment along with improvement in the body care assortments fragrances drove the segment sales. Victoria’s Secret and Bath & Body Works International sales surged 37.2% to $170.3 million. Other revenues increased 21.4% to $190.2 million.

Gross profit grew 5% to $2,040.3 million, while gross margin reduced 100 basis points (bps) to 42.3% primarily due to a fall in merchandise margin rate. Adjusted operating income dipped 0.1% to $986.6 million, with the operating margin contracting 150 bps to 20.5%.

We note that shares of L Brands have declined 13.7% in the past three months against the industry’s gain of 0.7%.

Store Update

In the quarter under review, L Brands opened five Victoria’s Secret stores and shuttered 19 outlets, taking the total count to 1,170 stores. In the same period, 32 Bath & Body Works stores were inaugurated and 31 were closed, which totalled to 1,694 stores. As a result, the company had 19 Victoria’s Secret U.K/Ireland and 27 Henri Bendel stores at the end of the fourth quarter. As of Feb 3, 2018, L Brands operated 3,075 stores.

Total franchised stores as of Feb 3, 2018 were 813, comprising 241 Victoria’s Secret Beauty & Accessories, 32 Victoria’s Secret, five Pink, 176 Bath & Body Works and 194 La Senza stores.

Other Financial Details

L Brands exited fourth quarter with cash and cash equivalents of $1,514.9 million, down from the prior-year quarter’s tally of $1,933.8 million. Long-term debt increased marginally to $5,707 million from $5,699.6 million a year ago. Also, shareholders’ deficit came in at $751 million.

Management incurred capital expenditures of $107.4 million in the quarter under review and $706.7 million in fiscal 2017. For fiscal 2018, the company projects the same to be roughly $750 million. Meanwhile, L Brands continues to anticipate free cash flow of $900 million in the fiscal year.

In fiscal 2017, the company repurchased 9.4 million shares for $444.9 million. At the year-end, it had $48 million remaining under the current share buyback program of $250 million.

Guidance

Management issued guidance for first-quarter and fiscal 2018. Additionally, the company is likely to follow a new revenue recognition accounting standard in the first quarter.

Comps in February are expected to rise in low- to mid-single digits, including a low-single digit growth at Victoria’s Secret along with mid-single digits rise at Bath & Body Works. However, merchandise margin rate is expected to decline for the month.

This Zacks Rank #3 (Hold) company anticipates first-quarter comps in low-single digits. In fact, sales are estimated to be nearly 5 points higher than comps. Further, gross margin is expected to decline marginally due to a fall in merchandise margin rate, somewhat offset by lower buying and occupancy expenses. Earnings per share are envisioned in the range of 15-20 cents versus 33 cents in the year-ago quarter.

For fiscal 2018, the company envisions comps to increase in the 2-4% range while sales are anticipated to be 2 points higher than comps. Gross margin rate is anticipated to remain flat compared with the prior-year tally. Management projects earnings in the band of $2.95-$3.25 per share compared with $3.20 last year.

Analysts polled by Zacks anticipate earnings per share of 32 cents and $3.36 for first-quarter and fiscal 2018, respectively. These estimates are likely to witness downward revisions.

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