L Brands (LB, Financial) is a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and accessories. The apparel stores company operates in three segments: Victoria’s Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. L Brands’ first quarter fiscal 2015 results were mixed. Let’s recap the numbers and delve deeper to see if it warrants a buy.
First-quarter numbers
- Victoria’s Secret registered 5% year-over-year growth to $1,683.9 million on the back of 5% year-over-year growth in comps.
- Bath & Body Works sales soared 5% year-over-year to $613.3 million, backed by a 4% year-over-year growth in comps.
- Victoria’s Secret and Bath & Body Works International’s sales moved up 29% year-over-year to $91.5 million and other revenues declined 9% year-over-year to $123.2 million.
- L Brands posted net sales of $2,511.9 million, representing a 5% year-over-year growth, but fell short of analysts’ expectations by $30 million. The top-line soared on the back of 5% year-over-year increase in comps, on top of 2% in the year-ago quarter.
- Gross profit inched up by 8% to $1,056 million and gross margin expanded by 90 basis points, or bps, to 42%. Operating income and operating margin increased 11% and 70 bps, respectively.
- Adjusted earnings came in at $0.61 per share, ahead of analysts’ expectations by $0.01 per share. However, the net income growth has outperformed the S&P 500 and the Specialty Retail industry.
- L Brands exited the quarter with cash and cash equivalents of $648.5 million and long-term debt of $4,759.6 million.
Growth initiatives
It is worth a mention that 70% of L Brands’ CapEx budget is for real estate and stores. The company plans to augment Victoria's Secret square footage in North America by about 4% this year, on the back of expansions of existing Victoria's Secret stores and 25 net new openings.
L Brands also plans to increase the Bath & Body Works square footage in North America by about 3%, backed by 24 net new openings and 83 remodels. In all, the total square footage of the company in North America will increase by about 3.5% during fiscal 2015.
The company is also expanding in international markets as it offers excellent growth potential. During the recently reported quarter, the company opened 29 gross international locations, taking the total international store count to 420. The company will open additional four Victoria's Secret International stores in the U.K. and eight in the Middle East.
In addition, the Victoria’s Secret beauty and accessories business continues to flourish with 304 locations opened at the end of the quarter. L Brands plans to add 100 or so stores across the globe in 2015. The company also plans to add 40 new Bath & Body Works international stores in the current fiscal.
As at the end of quarter, L Brands operated 2,966 stores and 668 franchised stores across the globe. The store expansion initiative, both owned and franchised, will help L Brands maintain the growth momentum in the long run.
Outlook
L Brands expects comps growth to be in the low single-digits during second quarter and fiscal 2015. EPS for the second quarter is expected to be in the range of $0.60-$0.65 and between $3.50 and $3.70 for fiscal 2015. These figures are below the consensus estimates, and hence stock declined after the results on weak guidance.
Wrapping up
L Brands grew comps, despite the currency translation headwinds. The specialty retailer of women’s intimate and other apparel is also expanding its store count across the globe to drive growth. For the next five years, growth is expected to be at a CAGR of 9.44%. In addition, it is a shareholder friendly company and carries a dividend yield of 2.20%. The company’s margins are increasing and it has delivered good top-line growth.
Despite the muted outlook, I would still consider this stock as a good bet for long term gains.
