Earnings Preview: Limited Brands

Limited Brands Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, is scheduled to report its first-quarter 2011 financial results after the bell on Wednesday, May 18, 2011.

The current Zacks Consensus Estimate for the quarter is 39 cents a share. For the quarter under review, revenue is $2,218 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2010, a Synopsis

Limited Brands’ quarterly earnings of $1.26 per share came a penny ahead of the Zacks Consensus Estimate, but rose 24.8% from $1.01 earned in the prior-year quarter riding on the improving sales environment. The quarterly earnings also came well ahead of the company’s guidance range of $1.02 to $1.17 per share.

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), posted net sales of $3,455.9 million that climbed 12.8% from the prior-year quarter and outdid the Zacks Consensus Estimate of $3,397 million. The improvement can be credited to consumers, who cut back their discretionary spending during the recession are now gradually loosening their wallets.

Healthy Sales Lifts Outlook

Recently, Limited Brands posted strong sales results for the four-week period ended April 30, 2011 on the heels of healthy sales at its Victoria’s Secret Stores and Bath and Body Works. Comparable-store sales for April 2011 rose 20%, following a 14% increase in March 2011, and compared with a 4% growth posted in March 2010.

Limited Brands said that net sales for April rose 16.9% to $683.2 million from $584.6 million posted in the same month last year.

On the back of better-than-expected sales results for the month of April, Limited Brands now expects first-quarter 2011 earnings between 37 cents to 39 cents a share, reflecting a year-over-year growth of 48% to 56%. Earlier, management had earnings in the range of 26 cents to 31 cents a share.

First-Quarter 2011 Zacks Consensus

The analysts considered by Zacks, expect Limited Brands to post first-quarter 2011 earnings of 39 cents a share. The current Zacks Consensus Estimate reflects a growth of 56% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 36 cents and 40 cents.

Zacks Agreement & Magnitude

Of the 17 analysts following the stock, 12 analysts have increased their projections in the last 30 days, and none lowered the estimate, thereby leading to an increase of 4 cents a share in the Zacks Consensus Estimate, which currently stands at 39 cents.

In the last 7 days, none of the analysts revisited their estimate, keeping the Zacks Consensus Estimate unchanged.

Mixed Earnings Surprise History

With respect to earnings surprises, Limited Brands has met as well as topped the Zacks Consensus Estimate over the last four quarters in the range of 0.0% to positive 31.6%. The average remained at positive 12.8%. This suggests that Limited Brands has beaten the Zacks Consensus Estimate by an average of 12.8% in the trailing four quarters.

Our View

Limited Brands’ sustained focus on cost containment, inventory management, and merchandise initiatives has kept it afloat in a sluggish retail environment, as evident from its fourth-quarter 2010 results. 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 has been performing well, and the company is constantly revamping its La Senza brand. Limited Brands is keen to enhance its retail footprint across the globe by expanding aggressively in Canada and other international markets. However, stiff competition and erratic consumer behavior remain matters of concern.

Currently, we have a long-term Neutral rating on the stock. However, Limited Brands holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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