Expect Sustained Top And Bottom Line Growth From L Brand (LB)

L Brands (NYSE:LB) recently released its first quarter results for the fiscal year of 2015 with their EPS climbing by 15% to $0.61 from $0.53 in the same quarter last year. The rise in EPS was driven by a 5% increase in the top line as net sales grew by 5% to $2.511 billion from the same quarter last year as the company’s infamous brands Victoria’s Secret and Bath Body Works showed promising growth in operating income, growing by 10.6% and 17.3% respectively. Despite the latest performance the company stock failed to show any positive reaction as share prices have gone down by as much as $2.25 per share since the company released its quarterly report.

This lack of positive movement in the stock price can be attributed to the company’s disappointing guidance. The company believes that the upcoming period will show slow comparable sales growth in two of its major brands, Victoria’s Secret and Bath Body Works, even though net sales figures will remain rather satisfactory. The Columbus, Ohio based company expects comparable sales growth to remain in the lower single digits owing mostly to the strengthening value of the dollar. a secondary reason is that the company’ Victoria’s Secret division is facing restricted revenue growth and is being forced to sell goods at discounted prices. It seems like the company will have to resort to increasing its square footage of the lingerie retailer by 4% by the end of this year while it also plans to increase the square footage of its Bath Body Works division by opening 24 new stores and remodeling 83 of the already existing ones. This is going to be beneficial in especially for its operations in the US considering that the US economy has been showing signs of fairly robust economic recovery, especially with the Federal Reserve’s chairman, Janet Yellen, announcing that she expects the central bank to begin raising interest rates “at some point this year”. This rise in borrowing rates will signify that the US economy has improved to the point where consumers’ buying power has improved, a scenario which should prove fruitful for fashion retailing brand such as L Brands.

Similarly the company is looking elsewhere for potential growth prospects, particularly beyond Europe and in the Middle East. L Brands plans to expand its international market presence in the coming years as it plans to open a further 8 Victoria’s Secret stores in the Middle East and 4 stores in the UK. Just this past quarter the company opened up 29 more stores in international locations taking the total international store count to 420.

Unfortunately, despite the fairly promising aspects the company has to offer there are a number of institutions which are choosing to downgrade the stock to a hold or sell. However earlier today Goldman Sachs’ equities research analysts upgraded L Brands stock to “conviction buy”. Goldman Sachs justified their reevaluation stock by stating the record performances of the company’s chains in the United States, particularly its Victoria’s Secret and Bath Body Works divisions which recorded robust double digit growth figures in their operating incomes. It also further pointed out that the company’s expanding international presence will help secure its revenue structure to the extent that it could potentially double its revenue over the next decade.

Nonetheless the company has posted a guidance EPS of $3.50-$3.70 which has been upgraded from the $3.45-$3.65 it posted at the end of last year. Considering the strong gains the company made in its revenue growth and its market presence, the current guidance is a bit of a disappointment for investors. Both Victoria’s Secret and Bath Body Works are renowned brands and are considered prime choices for consumers across the world and their recent gains reflect the brands’ superiority. So when we take a closer look at other possible reasons behind the company’s dismal guidance we also find out that the company expects to pay taxes at the rate of 37.5% as compared to the 36.3% rate it paid in 2014. The company believes this rate will negatively affect the earnings per share by $0.07. When you couple that with the expected negative impact of $0.10 to $0.12 on EPS by foreign exchange headwinds you can understand why the company announced a conservative guidance.

Over the past 2 months L Brands’ share prices have gone from a high of $95 per share to its current position of $87.28 per share. On 21st May the company announced its regular quarterly dividend of $0.50 per share which marked the 162nd consecutive quarter the company has paid a dividend. As far as the company’s performance goes it has its focus set on driving growth regardless of the negative external influences which are expected to hamper EPS growth. This determination to expand its operations (including the increasing focus in the Middle East) will help the company in the long run. Sure for short term investors the last 3 months might have been worrying since the stock remained rather flat and sometimes even seemed to show signs of declining. We might even see this pattern continue throughout this year however that should not discourage long term investors who have a healthy appetite for risk. Once the US economy stabilizes we can expect sustained top and bottom line growth from L Brand in the coming years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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