Limited Brands Preview: Well Positioned Though Q3 Could Be Slow

November 8th, 2012 by Trefis Team
63.95
Trefis
LTD: L Brands logo
LTD
L Brands

Limited Brands (NYSE:LTD) is scheduled to release its Q3 fiscal 2012 earnings on November 14th. According to the retailer’s October sales result, the earnings will show the third quarter comparable store sales growth of 6% for Victoria’s Secret Stores and 5% for Bath & Body Works. [1] This growth is slightly less than what the company saw in the previous quarter as the third quarter is seasonally weak. [2] Given the margin decline seen in the last quarter and additional costs incurred this quarter due to store remodeling and pre-opening expenses, we expect margin pressure to continue. Moreover, the October sales results display revenue decline mainly due to the contribution of Mast Global in Q3 fiscal 2011, which was sold later.

See our complete analysis for Limited Brands

Operating Margins Will Be Under Pressure

Relevant Articles
  1. L Brands Stock Can Gain 2x The S&P 500, But There Is A Catch
  2. Limited Brands Reports Steady Growth In Q3; Outlook Looks Good
  3. Limited Brands Earnings Preview: Intimates Will Drive The Company Through The Industry Slump
  4. Good Inventory Planning And Global Expansion Will Drive Limited Brands’ Growth
  5. Intimates Are Driving Victoria’s Secret Growth Despite A Lull In Apparel Sales
  6. Limited Brands Posts Steady Growth And Raises Its Outlook

In the second quarter, Limited Brands reported a decline in its Victoria’s secret stores’ margins.  This was driven by promotional offers and lower pricing during the semi-annual sale. Moreover, the increase in clearance sales and a shift in its marketing strategy to complement new launches in early August also negatively impacted the margins. [2] The continuing promotions through direct mail offers and free gifts with purchases are expected to have a negative effect on this quarter’s operating margins as well.

Limited Brands also reported in its last quarter earnings that it will be investing in 40 new store openings and remodels in the fall season. [2] It also included the plans to improve the customer experience by investing in staff training and store development programs. These initiatives are likely to increase the company’s costs and weigh on operating margins. Moreover, the addition of windows and the POS in the stores will further increase the expenses. [2] With the third quarter being the weakest in terms of sales volume, the plans clearly show the retailer’s emphasis on the holiday season.

However, with the sale of the sourcing business in November 2011, the gross margins are expected to improve in this quarter.

Sale Of Sourcing Business Will Drag Down Revenues

In November 2011, Sycamore Partners LLC acquired 51% stake in Limited Brands’ third party sourcing business, Mast Global Fashions. [3] The retailer will be reporting an overall revenue decline due to the absence of its sourcing business. According to its guidance, the company will show a revenue decline of 6% for the recently concluded quarter. [1] However, excluding the effect of this business sale, the revenues will increase by 7%, which implies that the retailer is on the right track.

We expect a bright future for the company given its strong brand recognition in the U.S. and international expansion plans.

Our price estimate for Limited Brands Stands at $56 , implying a premium of about 15% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Limited Brands Reports October 2012 Sales and Increases Third Quarter Earning Guidance, Limited Brands, Nov 1 2012 [↩] [↩]
  2. Limited Brands’ Q2 fiscal 2012 earnings transcript, Aug 16 2012 [↩] [↩] [↩] [↩]
  3. Limited Brands Inc., Reuters [↩]