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Limited Brands (LTD)

Q3 2011 Earnings Call

November 17, 2011 9:00 am ET

Executives

Martyn R. Redgrave - Chief Administrative 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

Leslie H. Wexner - Founder, Executive Chairman, Chief Executive Officer, Chairman of Executive Committee and Group President of Lingerie

Nicholas Coe - Chief Executive Officer

Amie Preston - Vice President Investor Relations

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

Analysts

Dana Lauren Telsey - Telsey Advisory Group LLC

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

Stacy W. Pak - Barclays Capital, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

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

Brian X Tunick - JP Morgan Chase & Co, Research Division

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

Michelle Tan - Goldman Sachs Group Inc., Research Division

Howard Tubin - RBC Capital Markets, LLC, Research Division

Marni Shapiro - The Retail Tracker

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

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Janet Kloppenburg - JJK Research

Presentation

Operator

Good morning, my name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. Chief Investor Relations Officer, Amie Preston, you may begin your conference.

Amie Preston

Thanks, Matt. Good morning, everyone, and thank you for joining us today.

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.

Joining us today are Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO Victoria's Secret; Nick Coe, CEO; and Andrew Meslow, CAO at Bath & Body Works; and Martyn Redgrave, EVP and CAO. After our prepared comments, we'll be available to take your questions for as long as time permits. [Operator Instructions]

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

Stuart B. Burgdoerfer

Thanks, Amie, and good morning, everyone. We are pleased with our third quarter performance. Our adjusted earnings per share increased 39% to $0.25 per share versus $0.18 last year. Our reported result was $0.31 per share versus $0.18 last year. This year's reported third quarter result included an income tax benefit primarily due to resolutions of certain tax matters of $16.7 million or $0.06 per share. All results discussed on this call exclude this significant item.

To take you through the third quarter results as detailed on Page 3 of the presentation. Net sales were $2.173 billion versus $1.983 billion last year, and comps increased 9%. The gross margin rate increased 10 basis points to 36.1% as leveraged on [indiscernible] occupancy expense offset a decline in the merchandise margin rate. As expected, our third quarter merchandise margin rate was negatively impacted by increased costs. We continue to focus on managing total expense growth at a rate that is lower than sales. Total expenses, the combination of buying and occupancy and SG&A increased by 5% and leveraged as a percent of sales. SG&A dollars increased by $34 million or 6%, and the SG&A rate leverage by 90 basis points. A significant portion of our SG&A is variable and we will continue to manage that proactively throughout the quarter in response to our sales trends. Principally all of our SG&A expense growth in the third quarter relates to investments that we make in store selling to support and drive sales growth. These investments include higher selling payroll related to the growth in sales, increased investment in training and investment in other store initiatives, including technology.

Turning to operating income on Page 5 of the presentation, total operating income increased $37 million or 25% and 100 basis points as a percent of sales to $186.1 million or 8.6% of sales. By segment, the Victoria's Secret segment increased by $25.6 million or 90 basis points as a percent of sales to $148.8 million or 11.3% of sales. Bath & Body Works increased by $8.9 million or 130 basis points as a percent of sales to $40.6 million or 8.1% of sales. And the other segment operating loss improved by $2.5 million to $3.3 million driven by improved profitability at Mast. Total nonoperating expenses increased by $16.6 million driven by increased interest expense associated with the $1 billion bond issuance.

Turning to the balance sheet on Page 9. Retail inventories per square foot at cost ended the quarter up 2% versus last year. We repurchased 4.8 million shares of stock in the third quarter for $172 million. We completed our previous $500 million share repurchase program and the Board authorized a new $250 million program on November 3.

Turning to Page 10 of the presentation for our forecast for 2011, adjusted earnings per share between $1.28 and $1.43 in the fourth quarter against last year's record $1.26 result. This forecast reflects a low-single digit comp increase. Also as we previously announced, at the beginning of November we sold a 51% interest in our third-party sourcing business. We retain 100% ownership of our intimate apparel and personal care and beauty sourcing business. We received $125 million in net pretax cash, and we expect to recognize a pretax gain of approximately $115 million in the fourth quarter. This gain is not included in our guidance.

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