Reason for Report: Flash Update: 4Q13 Earnings Release

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: 4Q13 Earnings Release

Note: Jul 11, 2013, Flash Update: June Comps.

Prev. Ed.: September 12, 2012, 2Q12 Earnings Update.

Flash Update [Note: earnings update in progress; final report to follow]

On Feb 26, 2014, L Brands formerly known as Limited Brands, posted 4Q13 earnings of $1.65 per share that came ahead of the Zacks Consensus Estimate of $1.61 but fell 6% from the prior-year quarter earnings of $1.76.

This specialty retailer of women’s intimate and other apparel, beauty and personal care products posted net sales of $3,818.2 million, down 1% from $3,855.6 million reported in the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $3,855 million.

L Brands, which operated 2,923 stores as of Feb 1, 2014, posted comparable-store sales growth of 1% during the quarter compared with 5% in the prior-year quarter.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 1% to $1,724.2 million, whereas comps were up 3%. Victoria's Secret Direct sales fell 6% to $504.5 million. Total Victoria’s Secret sales edged down 1% to $2,228.7 million. Bath & Body Works & The White Barn Candle Co.’s total sales decreased 4% to $1,205.4 million, with a 1% decline in comps. Comps at La Senza fell 3%, while sales plummeted 9% to $92.8 million.

Gross profit for the quarter tumbled 6% to $1,642.3 million, whereas gross margin contracted 220 basis points to 43%. Operating income fell 5% to $863.5 million, whereas operating margin shriveled 90 basis points to 22.6%.

Management now forecasts earnings in the range of $0.44 to $0.49 a share for the 1Q14 and between $3.00 and $3.20 per share for FY14.

L Brands projects total comparable-store sales ranging from flat to the low-single-digits for February.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON LTD.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Limited Brands Inc. (LTD) is a specialty retailer selling women’s intimates, apparel, and accessories, as well as beauty and personal care products, primarily through the Victoria’s Secret (VS) and Bath & Body Works (BBW) segments.The company manufactures and distributes its products through retail stores, websites and catalogues.Moreover, the company sells some third-party intimates and personal care products and is focused almost entirely on the U.S. market.

Of the nineteenfirms covering the stock, ten assigned positive ratings, eight conferred neutral ratings, while one firm provided a negative rating on the stock.

The following is a summarized opinion of the diverse brokerage viewpoints:

Positive or equivalent (52.6%; 10/19 firms): The firms believe that the company’s sustained focus on cost containment, inventory management and merchandise initiatives have kept it afloat even amidst difficult operating environment. Moreover, these firms opine that the company started 3Q12 with a better inventory level, which signifies reduced markdown risks and will prove accretive to its topline.

Going forward, they expect comps to rise through operating efficiencies, differentiated assortments and strong brand strength. The firms remain upbeat on the company’s commitment to return excess cash to shareholders through a combination of share repurchases and dividends.The firms are optimistic about the company’s international ventures and expect revenue to rise through its major brands. Moreover, they believe that management’s efforts in restructuring the business in the past quarters could assist the sales growth in the coming years.

Neutral or equivalent (42.1%; 8/19 firms): These firms believe that the company is poised to grow in the long runfrom domestic productivity enhancements through strong comps and substantial international expansion. However, some cautious firms point out that with heightened competition, in order to generate incremental sales, marketing costs will shoot up, which in turnwill take a toll on the margins in the coming quarters. Moreover, these firms remain on the back-foot due to lack of near-term catalysts to drive sales.

September 12, 2012

Overview[Note: only highlighted material has been changed]

Based in Columbus, Ohio, Limited Brands, Inc. (LTD) is a specialty retailer of women’s intimate and other apparels, beauty and personal care products, home fragrance products and accessories. The company sells its merchandises through specialty retail stores in the United States and Canada, which are primarily mall-based, and through its websites, catalogue and other channels. The company conducts its business primarily through two reportable segments – Victoria’s Secret and Bath& Body Works.

The Victoria’s Secret segment sells merchandise under the brand names such as Victoria’s Secret, Pink and La Senza. The Bath & Body Works segment sells merchandise under the brand names such as Bath& Body Works, C.O. Bigelow, White Barn Candle Company and other brand names. The Other segment includes, Henri Bendel, featuring accessories and personal care products; Mast, an apparel merchandise sourcing and production company, serving Victoria’s Secret, La Senza and third-party customers; and Beauty Avenues, a personal care sourcing and production company that serves Victoria’s Secret, La Senza and Bath& Body Works.

Firms identified the following factors for evaluating the investment merits of LTD:

• Store openings, sub-brand expansion, and new product launches are driving LTD’s growth.

• Limited Brands seeks to expand aggressively in Canada and internationally. The stores are generating sales volumes of nearly two and a half times more than the U.S. average.
• New initiatives like marketing, joint venture possibilities, less emphasis on third-party brands, and store segmentation may accelerate growth at BBW.
• The company is actively managing its cash flows, and returning much of its free cash via dividends and share repurchase.

• Limited Brands faces stiff competition from chain specialty stores, department stores and discount retailers on attributes such as, marketing, design, price, service, quality, and brand image.
• Most of the company’s stores are located in retail shopping areas, such as malls that have been registering lower sales volume and declining traffic.
• The company’s profitably is affected by consumer spending trends,which is sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels.

The company’s website address is LTD’s fiscal year ends on January 31.

Long-Term Growth[Note: only highlighted material has been changed]

Although the firms are encouraged by the new strategies taken by management, they are skeptical about the management’s ability to improve the business meaningfully, given the challenging macro-environment and continuation of negative mall traffic as well as the long-term nature of some of the initiatives.

Management expects domestic sales to double over the next five years through productivity enhancements (remodels and supply chain improvements) and square-footage expansion.

Victoria’s Secret focuses on store operational improvements (sales associate training, inventory availability, fixture and floor spacing), realizing a solid initial return on investment.Bath & Body Works is working to launch more products that are modern, fashionable and relevant.

Management remains committed to appropriately align inventories, expenses, and capital spending, with a goal of delivering robust free cash flow while maintaining a strong financial condition. The brands are targeting promotions to drive traffic and maximize margin dollars, as consumers continue to be extremely price sensitive, while making fewer trips to the mall and spending less on an average transaction.

September 12, 2012

Target Price/Valuation[Note: only highlighted material has been changed]

Risks to the target price include prolonged comparable store sales contraction, driven by weak mall traffic, continued mis-execution at its core VS and/or BBW franchises, the challenges associated with managing complex operations, and the fashion risk associated with being in a highly seasonal, cyclical, and fashion oriented business.

Recent Events [Note: only highlighted material has been changed]

On Jul 11, 2013, Limited Brands announced that comparable store sales for June remained flat. Net sales for the month increased 2.2% to $1,101 million from $1,077 million in the prior-year period.

On Jun 6, 2013, Limited Brands announced that comparable store sales rose 3% for the month of May. Net sales for the month increased 9.7% to $737 million from $671.9 million in the prior-year period

On May 22, 2013, L Brands, Inc. formerly known as Limited Brands, posted 1Q13 earnings of $0.48 a share that beat the Zacks Consensus Estimate by a couple of dollars and rose 17% from the prior-year quarter earnings of $0.41. The consumers, who cut back on their discretionary spending during the recession, are now gradually opening their wallets. The company also lifts it FY 2013 earnings guidance.

Let’s Dig Deep

This specialty retailer of women’s intimate and other apparel, beauty and personal care products posted net sales of $2,268 million, up 5% from $2,153.8 million reported in the prior-year quarter, and surpassed the Zacks Consensus Estimate of $2,250 million.

Limited Brands, which operated 2,873 stores as of May 4, 2013, posted comparable-store sales growth of 3% during the quarter compared with 7% in the prior-year quarter.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 5% to $1,145.6 million, whereas comps were up 3%. Victoria's Secret Direct sales fell 6% to $359.1 million. Total Victoria Secret sales grew 2% to $1,504.7 million. Bath & Body Works & The White Barn Candle Co.’s total sales grew 5% to $530.1 million, with a 3% increase in comps. Comps at La Senza jumped 5%, but sales tumbled 3% to $72.8 million.

Gross profit for the quarter grew 4% to $941.4 million, whereas gross margin contracted 40 basis points to 41.5%. Operating income advanced 6% to $311.2 million, whereas operating margin increased 10 basis points to 13.7%.

Strolling Through Guidance

Management now forecasts earnings in the range of $0.50 to $0.55 for the second quarter and between $2.95 and $3.15 per share for FY 2013. The company had earlier projected FY 2013 earnings guidance of $2.92 to $3.12 per share.

The current Zacks Consensus Estimate for the second quarter and FY 2013 are $0.54 and $3.12 per share.

Limited Brands now projects comparable-store sales to rise in the low single-digit for the month of May.

Let’s Conclude

The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores have been performing well, and the company is revamping its La Senza brand alongside.

Limited Brands is keen on augmenting its retail footprint internationally by expanding aggressively in Canada and other international markets. However, stiff competition and erratic consumer behavior still remain major causes of concern.

On May 9, 2013, Limited Brands announced that comparable store sales rose 2% for the four-week period ended May 4, 2013. Net sales for the month increased 0.2% to $660.5 million. Limited Brands now projects earnings of $0.46 per share for 1Q13.

On Feb 7, 2013, Limited Brands announced that comparable store sales rose 3% for the four-week period ended Mar 2, 2013. Net sales for the month increased 9% to $712.7 million from $653.9 million in the prior-year period.

Limited Brands Beats Estimates – Feb 27, 2013

Limited Brands posted 4Q12 earnings of $1.76 per share that beat the Zacks Consensus Estimate of $1.73 and rose 17.3% from the prior-year quarter earnings of $1.50. The consumers, who cut back on their discretionary spending during the recession, are now gradually opening their wallets.

Including one-time items, earnings came in at $1.39, up from $1.17 in the year-ago period.

Let’s Dig Deep

Limited Brands posted net sales of $3,855.6 million, up 9.7% from $3,515.4 million reported in the prior-year quarter, and surpassed the Zacks Consensus Estimate of $3,785 million. The prior-year period sales included $13.1 million from a third-party apparel sourcing business that was sold in Nov 2011.

Limited Brands posted comparable-store sales growth of 5% during 4Q12 compared with 7% in the prior-year quarter and in line with the previous quarter. Comps rose 5% in Nov 2012, 3% in Dec 2012, and 9% in Jan 2013.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 9% to $1,713.4 million, whereas comps were up 3%. Victoria's Secret Direct sales rose 2.9% to $534 million. Total Victoria Secret sales grew 7.5% to $2,247.4 million. Bath & Body Works & The White Barn Candle Co.’s total sales surged 10.8% to $1,249.6 million, with a 7% increase in comps. However, comps at La Senza remained flat, whereas sales tumbled 14.2% to $102.4 million.

Adjusted gross profit for the quarter surged 12.9% to $1,743.2 million, whereas gross margin expanded 130 basis points to 45.2%. Adjusted operating income advanced 15.4% to $907.8 million, whereas operating margin augmented 110 basis points to 23.5%.

Other Financial Details

Limited Brands, which operates 2,876 stores as of Feb 2, 2013, recently raised its quarterly dividend by 20% to $0.30 (or $1.20 annually) from $0.25 a share (or $1.00 annually). The increased dividend, which is the 153rd successive quarterly payout, will be paid on Mar 8, 2013, to stockholders of record as of Feb 22, 2013.

Strolling Through Guidance

Management now forecasts earnings in the range of $0.40-$0.45 for the 1Q13 and between $2.92 and $3.12 per share for FY13.

For the month of February, Limited Brands reiterated its comparable-store sales growth guidance of low single-digits.

Revenue [Note: only highlighted material has been changed]

Limited Brand reported total revenue of $2,399.1million in 2Q12, which fell 2% from2Q11 from $2,458.1 million (inline with the Zacks Digest model). The 2Q11 sales included $216.6 million from a third-party apparel sourcing business.Comparable store sales (comps) increased 8% in 2Q12compared with 7% in 1Q12 and 9% in 2Q11.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

Provided below is a summary of segment revenue as compiled by Zacks Research Digest:

Note: Blank cells indicate that the brokers have not provided estimates.

Revenue by Segments

Victoria’s Secret (VS)

Total sales of Victoria’s Secret grew 8% to $1,576.7 million in 2Q12 compared with $1,457 million2Q11.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 10% to $1,170.1 million, whereas comps were up 10%. The increase in sales was attributable to improved merchandise assortments. Victoria's Secret Direct sales grew 3% to $406.6 million mainly due to rise in sales of lingerie, swimwear, Pink, sleepwear and beauty, offset in part by a fall in apparel sales. However, comps at La Senza edged down 3%, whereas sales tumbled 17% to $94.9 million.

As per the Zacks Digest model, segment revenue increased 6.4% y-o-y to $1,671.8 million in 2Q12 compared with $1,570.8 million in 2Q11.

Bath & Body Works (BBW) & The White Barn Candle Co.’s

Segment revenue improved 8% y-o-y to $609.1 million in2Q12 from2Q11, driven by growth in the Signature Collection, home fragrance, and antibacterial categories.Comps increased to 7% in 2Q12 (in line with the Zacks Digest model).

Others

Other revenue decreased 51.4% y-o-y to $213million compared with $438 million in 2Q11, primarily due to afall in third-party sales and decline in revenue at La Senza stores, partially offset by higher revenues in Canada from Victoria Secret and Bath & Body Works stores.

As per the Zacks Digest model, segment revenue was $118.2 million in 2Q12 versus $324.3 million in 2Q11, representing a decline of more than 63.6%.

The graphical representation of revenue segments is shown below:

Outlook

Limited Brands expects comparable-store sales to increase in the low-to-mid single digits in 3Q12 and between 3% and 5% in FY12.

The Zacks Digest model forecasts total revenue of $10,335.6million for FY12, $10,690.1million for FY13 and $11,087.0million for FY14, with a y-o-y decline of 0.3% in FY12 and a growth of3.4% in FY13 and 3.7% in FY14.

Please refer to the separately published LTD spreadsheet for additional details and updated forecasts.

Margins[Note: only highlighted material has been changed]

Adjusted gross profit for the quarter hiked 5% to $945.3 million compared with $902.1 million in 2Q11, aided by a 7% decline in cost of goods sold, buying and occupancy, whereas gross margin expanded 270 basis points (bps) to 39.4% (in line with the Zacks Digest model).

Adjusted General, administrative and store operating expensesincreased6.9% y-o-y to $636.3 million in 2Q12 compared with $595.1 million in 2Q11, mainly due to a rise in store selling expenses, increased expenses related to international expansions and higher promotional expenses.

Adjusted operating income inched up 1% to $308.9 million compared with $307.0 million in 2Q11. Operating margin augmented 40 basis points to 12.9% (in line with Zacks Digest model).

Provided below is a summary of margins as compiled by Zacks Research Digest:

Outlook

Benefiting from the sale of the sourcing business, management expects gross margin to improve remarkably in3Q12resulting in an expansion of about 400 bps. However, excluding the impact of the sale, gross marginisexpected tofall due to the contraction of merchandise margin rate. Management further anticipates SG&A rate to jump considerably due to adverse impact from the sale of the third-party apparel sourcing business of about 370 bps. Absent of this, the SG&A rate is expected to rise in the third quarter due to investments in store selling, store openings and remodels expenses, and marketing costs.

Gross margin rate for FY12 is also expected to rise considerably, gaining 250 basis points from the sale of the third-party apparel sourcing business. Management hinted gross margin rate would still be up, excluding the impact of the sale of business due to flat merchandise margin rate and a marginal improvement in the buying and occupancy expense rate. For full-year SG&A rate, an expansion of 170 bps is anticipated due to adverse impact from the sale of the third-party apparel sourcing business, whereas excluding this impact SG&A rate is expected to remain flat.