Categories Analysis, Earnings, Retail

Earnings preview: Rising cost pressures could drag L Brands’ Q4 results

There are mixed expectations ahead of the fourth-quarter report of L Brands (LB), which will be published Wednesday after the market closes. While analysts’ view on the company’s sales performance is encouraging, they see a decline in earnings that could impact investor sentiment. On the positive side, earnings topped expectations in all of the preceding four quarters.

Revenues of the specialty apparel retailer that owns the popular Victoria’s Secret brand are forecast to move up modestly to $4.85 billion in the December quarter. Earnings, adjusted for special items such as charges related to the sale of the La Senza brand, are expected to decline 2% to $2.07 per share even as margins remain under pressure due to the high selling, general & administrative costs.

Meanwhile, the projected bottom-line performance is broadly in line with the management’s outlook. Bath & Body Works has been the top-performing segment in recent quarters, and the trend is expected to continue in the most recent quarter.

Bath & Body Works has been the top-performing segment, and the trend is expected to continue in the most recent quarter

The fact that the company has been adding new stores aggressively and ramping up its online platform, despite the adverse market conditions, bodes well for its long-term growth prospects. L Brands has increased its presence in the international markets and the new markets help it maintain the overall sales momentum irrespective of regional economic volatilities.

Market watchers, in general, believe that after selling the loss-making La Senza unit last year, L Brands can now focus more on its flagship brand Victoria’s Secret, which has shown signs of weakness in recent quarters. The other factors that could add to growth are the management’s ongoing efforts to streamline inventory and reduce costs so that their negative impact on margins could be eased to some extent.

Related: L Brands Q3 2018 Earnings Conference Call Transcript

L Brands’ above-consensus profit and upbeat full-year outlook failed to impress the market when it reported third-quarter results a few months ago as the sentiment was dampened by a sharp reduction in the dividend. At $0.16 per share, adjusted earnings were slightly above estimates. Sales rose to $2.77 billion and matched the estimates, supported by a 4% increase in same-store sales.

Shares of the company have fallen about 38% in the past twelve months to a ten-year low. However, the stock gathered momentum early this year and stabilized, but continued to underperform the market.


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