Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
L Brands Tops Q1 Earnings Beat, Sales Lag Estimates
L Brands came up with the seventh straight quarter of positive earnings surprise, as it reported first-quarter fiscal 2017 results. However, the company’s revenues lagged the Zacks Consensus Estimate for the third quarter in row.
The company posted quarterly earnings of $0.33 per share beating the Zacks Consensus Estimate of $0.29 and also came above the company’s initial guidance of $0.20–$0.25, primarily owing to favorable tax rates. However, the company’s earnings declined 44.1% year over year.
This specialty retailer of women’s intimate and other apparel reported net sales of $2,436.5 million, down 7% from $2,613.8 million in the prior-year quarter. The figure was also below the Zacks Consensus Estimate of $2,456 million. L Brands comparable sales (including direct sales) were down 9% during the quarter. Further, store only comps also decreased 9% year over year. For the first quarter, the exit of the swim and apparel categories had an adverse impact of 6% and 9%, respectively to total company comps and Victoria’s Secret comps.
Sales at Victoria’s Secret Stores declined 10% to $1,246.5 million, while Victoria’s Secret Direct sales decreased 20% to $286.5 million. Total Victoria’s Secret sales dropped 12% to $1,533 million, while comparable sales declined 14%. Decrease in Total Victoria’s Secret sales can be attributable to low-double digits fall in lingerie sales in comparison with the prior-year quarter. However, PINK registered sales growth in low-single digits.
In an effort to streamline Victoria’s Secret business, the company made some strategic changes in 2016. L Brands stated that the strategic efforts will persist in 2017, which is likely to put pressure on the results. However, it is confident of achieving growth in the long run and envisions annual operating income increase of 10%.
Bath & Body Works’ total sales rose 3% to $678 million, with 2% rise in comparable sales. Strong performances of the company’s home fragrance assortment drove the segment sales. Victoria’s Secret and Bath & Body Works International’s sales were up 9% to $103.3 million. Other revenues increased 4% to $122.2 million.
Adjusted gross profit dipped 14% to $902.9 million, while gross margin contracted 320 basis points (bps) to 37.1% primarily due to buying and occupancy expenditure deleverage during the quarter. Adjusted operating income decreased 42% to $209.2 million, while the operating margin fell 510 bps to 8.5%. Decline in operating income was chiefly due to Victoria’s Secret.
During the quarter, L Brands opened two Victoria’s Secret stores in total and shuttered one outlet, consequently taking the total count to 1,178 stores. During the period, seven Bath & Body Works stores were opened but three were closed, which took the total count to 1,697 stores. The company had 15 Victoria’s Secret U.K. and 29 Henri Bendel stores at the end of quarter. As of Apr 29, 2017, L Brands operated 3,080 stores.
Total franchised stores as of Apr 29, 2017, were 790 that comprised 240 Victoria’s Secret Beauty & Accessories, 25 Victoria’s Secret, five Pink, 156 Bath & Body Works and 199 La Senza stores.
Other Financial Details
The company the quarter with cash and cash equivalents of $1,554.9 million, sharply up from the prior-year quarter’s figure of $1,267.5 million. The long-term debt decreased to $5,701.5 million from $5,718.5 million in the year-ago period. Moreover, shareholders’ deficit is pegged at $835.3 million.
During the first quarter, management incurred capital expenditures of $164.6 million, and now projects the same to be roughly $850 million for fiscal 2017. The company now anticipates generating free cash flow of $750–$850 million during the fiscal year.
In reported quarter, the company repurchased 1.6 million shares for $83 million. At the end of quarter, it had $170 million remaining under the current share buyback program of $250 million.
The company raised fiscal 2017 guidance. Management now projects earnings in the band of $3.10–$3.40 per share for fiscal 2017, up from the previous guidance of $3.05–$3.35 but below the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. Moreover, the company expects the fiscal second-quarter earnings in the range of $0.40–$0.45.
L Brands now anticipates comparable sales (excluding Victoria’s Secret swim and apparel) in the second quarter to decline in the mid-single digit range. For fiscal 2017, the company envisions comparable sales to be up by low-single digit, and anticipates total sales growth to be about 3 points higher than comps on account of square footage growth and also due to a 53rd week.
Gross margin is expected to deteriorate year over year during the second quarter as well as fiscal 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter.
L Brands, Inc. Price and Consensus
At this time, the stock has an average Growth Score of ‘C’, however its Momentum is lagging a lot with a ‘F’. The stock was allocated a grade of ‘A’ on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of ‘B’. If you aren’t focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for value investors than for those looking for growth.
While estimates have been moving upward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.