It has been about a month since the last earnings report for L Brands, Inc. LB. Shares have lost about 10.1% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is LB due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
L Brands Beats on Q4 Earnings, Issues FY18 Guidance
L Brands 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%.
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.
The 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been six revisions lower for the current quarter. In the past month, the consensus estimate has shifted downward by 41.4% due to these changes.
L Brands, Inc. Price and Consensus
L Brands, Inc. Price and Consensus | L Brands, Inc. Quote
VGM Scores
At this time, LB has a poor Growth Score of F, however its Momentum is doing a lot better with a C. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, LB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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