L Brands Second Quarter Preview: Monthly Sales Data Already Known But Profit, Gross Margin A Question Mark

L BrandsLB

will report its second quarter results after market close on Wednesday. L Brands reported its first quarter results on May 21. The company earned $0.53 per share, topping analyst expectations by one cent. Revenue grew 5.3 percent from a year ago to $2.39 billion and came in $10 million more than expected. Analysts at Stifel Nicolaus upgraded L Brands following its quarterly report. In June, analysts at Oppenheimer upgraded L Brands to Perform from Underperform.

Monthly metrics
L Brands, along with several other retails release its monthly sales metrics. May same-store sales rose three percent while total sales rose four percent from a year ago to $763.3 million. June same-store sale rose two percent while total sales rose seven percent from a year ago to $1.18 billion. July same-store sales rose six percent while total sales rose eight percent from a year ago to $735.3 million. Mizuho: Solid comps, clean inventory bodes well second half of 2014
Betty Chen of Mizohu Securities believes that L Brands is well positioned to grow in the second half of 2014. In a note to clients on August 7, the analyst notes that L Brands reported solid comps in July, and the momentum is expected to continue. “Encouragingly, despite the promotional environment, overall merchandise margin rate was flattish (higher at core Victoria Secret and Bath and Body Works) year over year. At Victoria's Secret, the comp was led by strength in lingerie as well as back to school assortments at Pink.” The analyst adds that L Brands is well positioned for the bottom half of the year as successful promotions allowed the company to exit the second quarter in a “very clean” position. In addition, the analyst is projecting normalized SG&A expenses in the second quarter with “flattish trends” for the remainder of fiscal 2014. International growth remains on track for another six locations in the United Kingdom (a potential $1 billion market) and six to eight locations in the Middle East (a potential $2 billion market). Chen is projecting L Brands will earn $0.62 in the second quarter on revenues of $2.6753 billion. The analyst is looking for total comps to rise three percent. Shares are Neutral rated with a $61 price target.
Credit Suisse
Christian Buss of Credit Suisse believes that L Brands has posted impressive comps while the company's “healthy” inventory levels will support margins. However, the analyst has concerns over the company's growth strategy. “We are encouraged by L Brands' demand momentum as well as inventory discipline in July, with inventory per square foot down nine percent year over year, suggesting likely margin acceleration going forward,” Buss wrote in a note to clients on August 7. “We continue to view a 16x forward P/E multiple as appropriate given continued aggressive square footage expansion in the U.S.” The analyst further adds that the company's gross strategy will hamper returns and hold back free cash flow generation long-term. Buss is projecting L Brands will earn $0.60 in the second quarter on revenues of $2.6753 billion.

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