Why the Profit Outlook is Much More Fashionable for This Retailer

Reporting disappointing earnings for the third quarter of 2012, fashion retailer Limited Brands (NYSE: LTD  ) issued a much more positive outlook for the next quarter and the full fiscal year. Exceeding the estimates of the analyst community, Limited Brands is starting the holiday season off right for its shareholders.

Lower revenues and profits for the third quarter
The third quarter is traditionally weak for Limited Brands, which operates Victoria's Secret and Bath & Body Works stores from its Columbus, Ohio headquarters. New store openings, promotional offers, and remodeling expenses reduced earnings for the third quarter. The Limited Brands invested in 40 new store openings for the 2012 fall season to strengthen its international presence in Canada, the United Kingdom, and the Middle East.

Overall, net income fell year over year for the third quarter, to $73.4 million, or $0.25 per share, from $94.3 million, or $0.31 a share. Adjusted earnings were $75.6 million, or $0.26 a share, down from $77.6 million.

Because Limited piled discounts into its third quarter -- most likely to clear out merchandise before the holidays -- revenues were down to $2.05 billion, equaling Wall Street estimates. For the third quarter of 2011, $2.17 billion was booked as revenue. Comparable store sales still rose by 5%, year over year, despite the decline in revenues.

Third-quarter revenue slumps seem traditional for Limited. As the chart below shows, its revenue typically rebounds strongly in each year's fourth quarter:

LTD Gross Profit Margin Quarterly Chart

LTD Gross Profit Margin Quarterly data by YCharts

Better days ahead
Management of the Limited Brands projects fourth quarter earnings to be in the range of $1.62 to $1.77 per share, compared to $1.17 reported for Q4 2011. The analyst consensus is now $1.77 per share, but that could change after the third-quarter earnings report. For fiscal 2012, the company lifted its earnings guidance from a range of $2.73 to $2.88 a share, to $2.78 to $2.93. That topped the Wall Street consensus of $2.90 a share.

Even before its more optimistic outlook, Limited Brand had a much better price-to-earnings ratio and five-year earnings-per-share growth rate than the industry average and competitors such as American Eagle (NYSE: AEO  ) , Urban Outfitters (URBN), The Gap (GPS) and Abercrombie & Fitch (NYSE: ANF  ) . Its dividend yield tops the industry average and most of its rivals, too.

Metric

Limited Brands

American Eagle (AEO)

Urban Outfitters (URBN)

The Gap (GPS)

Abercrombie & Fitch (ANF)

Industry Average

Price-to-Earnings Ratio

19.30

23

27.60

18.70%

40.90

20.40

5-Year Net Profit Margin Average

6.40%

6.90%

10.30%

6.70%

5.80%

4.20%

5-Year Earnings Per Share Growth Rate

24.89%

(11.29%)

7.82%

11.52%

(25.46%)

2.11%

Dividend Yield

2.20%

2.30%

0.00%

1.50%

1.70%

1.40%

Source: The Motley Fool CAPS

With 40 new stores in business, promotions winding down, and the traditionally strong holiday shopping season approaching, shareholders of the Limited Brand should soon be opening a higher stock price with a 2.17% dividend wrapped around it!

The Limited Brand and other retailers are now in the fourth quarter, when earnings are traditionally the highest.  This is a great time to invest in the sector, and there are 3 Companies Ready to Rule Retail covered in our special report. Uncovering these top picks is free today; just click here to read more.


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