L Brands, Inc.LB came up with seventh-straight quarter of positive earnings surprise, as it reported first-quarter fiscal 2017 results. However, the company's revenues lagged the Zacks Consensus Estimate for the third quarter in row.
The company posted quarterly earnings of 33 cents per share beating the Zacks Consensus Estimate of 29 cents and also came above the company's initial guidance of 20-25 cents, primarily owing to favorable tax rates. However, the company's earnings declined 44.1% year over year.
Further, the company raised fiscal 2017 guidance primarily owing to better-than-expected bottom-line. Following the results, the Columbus, OH-based company's shares climbed nearly 7% in the after-hours trading session on May 17. In fact, the L Brands shares have gained 7.5% in the past one month, outperforming the Zacks categorized Retail-Apparel/Shoe industry's decrease of 5.4%.
This specialty retailer of women's intimate and other apparel reported net sales of $2,436.5 million, down 7% from $2,613.8 million in the prior-year quarter. The figure was also below the Zacks Consensus Estimate of $2,456 million. L Brands comparable sales (including direct sales) were down 9% during the quarter. Further, store only comps also decreased 9% year over year. For the first quarter, the exit of the swim and apparel categories had an adverse impact of 6% and 9%, respectively to total company comps and Victoria's Secret comps.
Sales at Victoria's Secret Stores declined 10% to $1,246.5 million, while Victoria's Secret Direct sales decreased 20% to $286.5 million. Total Victoria's Secret sales dropped 12% to $1,533 million, while comparable sales declined 14%. Decrease in Total Victoria's Secret sales can be attributable to low-double digits fall in lingerie sales in comparison with the prior-year quarter. However, PINK registered sales growth in low-single digits.
In an effort to streamline Victoria's Secret business, the company made some strategic changes in 2016. L Brands stated that the strategic efforts will persist in 2017, which is likely to put pressure on the results. However, it is confident of achieving growth in the long run and envisions annual operating income increase of 10%.
L Brands, Inc. Price, Consensus and EPS Surprise
Bath & Body Works' total sales rose 3% to $678 million, with 2% rise in comparable sales. Strong performances of the company's home fragrance assortment drove the segment sales. Victoria's Secret and Bath & Body Works International's sales were up 9% to $103.3 million. Other revenues increased 4% to $122.2 million.
Adjusted gross profit dipped 14% to $902.9 million, while gross margin contracted 320 basis points (bps) to 37.1% primarily due to buying and occupancy expenditure deleverage during the quarter. Adjusted operating income decreased 42% to $209.2 million, while the operating margin fell 510 bps to 8.5%. Decline in operating income was chiefly due to Victoria's Secret.
During the quarter, L Brands opened two Victoria's Secret stores in total and shuttered one outlet, consequently taking the total count to 1,178 stores. During the period, seven Bath & Body Works stores were opened but three were closed, which took the total count to 1,697 stores. The company had 15 Victoria's Secret U.K. and 29 Henri Bendel stores at the end of quarter. As of Apr 29, 2017, L Brands operated 3,080 stores.
Total franchised stores as of Apr 29, 2017, were 790 that comprised 240 Victoria's Secret Beauty & Accessories, 25 Victoria's Secret, five Pink, 156 Bath & Body Works and 199 La Senza stores.
Other Financial Details
The company the quarter with cash and cash equivalents of $1,554.9 million, sharply up from the prior-year quarter's figure of $1,267.5 million. The long-term debt decreased to $5,701.5 million from $5,718.5 million in the year-ago period. Moreover, shareholders' deficit is pegged at $835.3 million.
During the first quarter, management incurred capital expenditures of $164.6 million, and now projects the same to be roughly $850 million for fiscal 2017. The company now anticipates generating free cash flow of $750-$850 million during the fiscal year.
In reported quarter, the company repurchased 1.6 million shares for $83 million. At the end of quarter, it had 170 million remaining under the current share buyback program of $250 million.
The company raised fiscal 2017 guidance. Management now projects earnings in the band of $3.10-$3.40 per share for fiscal 2017, up from the previous guidance of $3.05-$3.35 but below the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. Moreover, the company expects the fiscal second-quarter earnings in the range of 40-45 cents.
Analysts polled by Zacks anticipate earnings per share of 45 cents and $3.19 for second-quarter and fiscal 2017, respectively.
L Brands now anticipates comparable sales (excluding Victoria's Secret swim and apparel) in the second quarter to decline in the mid-single digit range. For fiscal 2017, the company envisions comparable sales to be up by low-single digit, and anticipates total sales growth to be about 3 points higher than comps on account of square footage growth and also due to a 53rd week.
Gross margin is expected to deteriorate year over year during the second quarter as well as fiscal 2017.
Currently, L Brands carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include The Children's Place, Inc. PLCE , Burlington Stores, Inc. BURL and Big Lots, Inc. BIG . The Children's Place sports a Zacks Rank #1 (Strong Buy), while Burlington Stores and Big Lots carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Children's Place delivered an average positive earnings surprise of 39% in the trailing four quarters and has a long-term earnings growth rate of 8%.
Burlington Stores delivered an average positive earnings surprise of 26.3% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.
Big Lots delivered an average positive earnings surprise of 83.1% in the trailing four quarters and has a long-term earnings growth rate of 13.5%.
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