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Limited Brands (LTD)

Q3 2012 Earnings Call

November 15, 2012 9:00 am ET

Executives

Amie Preston

Stuart B. Burgdoerfer - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Sharen Jester Turney - Chief Executive Officer of Victoria's Secret Megabrand & Intimate Apparel and President of Victoria's Secret Megabrand & Intimate Apparel

Nicholas P. M. Coe - Chief Executive Officer

Martin Waters - Executive Vice President of International

Analysts

Oliver Chen - Citigroup Inc, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

John D. Morris - BMO Capital Markets U.S.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Jeffrey S. Stein - Northcoast Research

Jennifer M. Davis - Lazard Capital Markets LLC, Research Division

Howard Tubin - RBC Capital Markets, LLC, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

John D. Kernan - Cowen and Company, LLC, Research Division

Presentation

Operator

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands' Third Quarter 2012 Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations officer for Limited Brands. Please go ahead.

Amie Preston

Thanks, Michelle. Good morning, everyone, and welcome to our third quarter earnings conference call for the period ending Saturday, October 27, 2012. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings. Our third quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, limitedbrands.com. Also available on our website is an investor presentation, which we will be referring to during this call. This call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria's Secret; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. [Operator Instructions] Also, just a reminder that all of the results discussed on this call are adjusted results and exclude the one-time items that are described in our press release.

Thanks, and now I'll turn the call over to Stuart.

Stuart B. Burgdoerfer

Thanks, Amie, and good morning, everyone. We reported adjusted third quarter earnings per share of $0.26 against last year's $0.25 per share or $0.22 per share, excluding the earnings related to the sold third-party sourcing business, which equates to an 18% increase in earnings per share. To take you through the third quarter results, as detailed on Page 4 of the presentation, comps increased 5% on top of 9% last year. Adjusting for the impact of the sourcing business sale, the gross margin rate increased by about 60 basis points, driven by an increase in the merchandise margin rate and buying and occupancy leverage. The SG&A expense rate improved by about 20 basis points. The merchandise margin rate was up in both the Victoria's Secret and Bath & Body Works segments. Our total company merchandise margin rate was negatively impacted by about 50 basis points from an increase in Mast sales to our international franchise businesses.

Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter, up 2% versus last year. Our inventories are clean and well-positioned as we head into the fourth quarter. We repurchased 171,000 shares of stock in the third quarter for $8.4 million. At quarter end, we had 52.2 million remaining under our current $500 million repurchase program. As noted in our release, our board has authorized a new 250 million share repurchase program.

Turning to Page 11 of the presentation for our forecast for 2012, we expect earnings per share between $1.62 and $1.77 in the fourth quarter against last year's adjusted result of $1.50. The extra week, the 53rd week this year, equates to about $0.08 per share. Our fourth quarter earnings forecast reflects a 2% to 4% comp increase. We expect the fourth quarter gross margin rate to increase to last year’s, driven by an increased merchandise margin rate and B&O leverage. We expect the fourth quarter SG&A rate to be roughly flat. We expect to end the fourth quarter with inventory per square foot up mid-single digits to last year. For the full year, we are projecting a comp increase of about 5%. We expect our gross margin rate to be up significantly, positively impacted by the sourcing business sale by about 250 basis points. Excluding this impact, our gross margin rate would still be up for the year, driven by a roughly flat merchandise margin rate and an improvement in the buying and occupancy expense rate. We expect the full year SG&A expense rate to be up, negatively impacted by the sourcing business sale by about 170 basis points. Absent this impact, we expect the SG&A rate to be about flat. Before any discrete items, our tax rate will be approximately 38.5%. Assuming all of these inputs and others, which are detailed in the presentation, we expect earnings per share for the full year 2012 to be between $2.78 and $2.93 per share. We expect 2012 CapEx of about $625 million, the high end of our previous range. The increase in CapEx versus last year is attributable to increased real estate investment at Victoria's Secret.

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