Limited Brands LTD adjusted earnings per share for the third quarter ended Oct. 29, 2011 increased 39% to $0.25 compared to earnings per share of $0.18 for the quarter ended Oct. 30, 2010, which exclude an income tax benefit in 2011. Third quarter operating income was $186.1 million compared to operating income of $149.1 million last year, and adjusted net income was $77.6 million compared to net income of $61.3 million last year.
The 2011 adjusted results above exclude an income tax benefit, primarily due to the resolution of certain tax matters, of $16.7 million, or $0.06 per share. Including this benefit, 2011 net income was $94.3 million and earnings per share were $0.31.
Comparable store sales for the third quarter increased 9 percent, and net sales were $2.173 billion compared to $1.983 billion last year.
The company stated that it expects adjusted fourth quarter earnings of $1.28 to $1.43 per share. For 2011, the company increased its adjusted earnings per share forecast to $2.38 to $2.53 from $2.35 to $2.50 previously.
Analysis by eps | reports (c/o MorningPick)
LTD's revenues growth during the past five quarters appears to be laboring as reflected in the EPS report above. LTD's sales were $2.242 bln for the quarter 2010-07. Today's sales is thus a decrease of -2.84% over five quarters as U.S. softening demand for retail products have stifled the firms ability to grow sales. Combined that with market saturation for lingerie and perfume, and consumer spending taking a back seat to consumer de-leveraging despite growth in credit card balances in September of $10 bln, Limited Brands face strong local headwinds. Thus, the firm will have to depend on international markets and growth for its EPS to get ahead of its PE ratio which may then pull the market price up.
As increasing operating expenses outpaces sales growth, the earnings per share growth remains moldy. It is only because of cost of goods sold trimming 2% since 2010-07 is the company able to report a decent EPS. But with a PE ratio of 15.60 and a projected EPS of $2.45 today's report will fail to capture buying interest.
The EPS-to-dividend cover is about 4:1. In other words, LTD earns $2.78 for every $0.70 it pays out in dividends. Thus, I expect the dividend to remain in place. However, with a current ratio of 1.97 and a debt-to-equity ratio of 5.64 reported in the previous quarter, I don't expect the dividend to rise despite the company holding $997 mln in free cash flow. In fact, the firm has only increased dividends once in the past five years.
During the past year, the firm's frequency of insiders activity has been busier than the previous year, although the total number of shares sold remains below last year's. There have been 21 insider selling transactions in fiscal 2011 compared to 15 in 2010, and yet we still have 6 weeks left in fiscal 2011.
Nine of thirty three analysts covering LTD recommend the shares as a Buy. Only one forecasts LTD to Outperform the sector while twelve rate LTD as a Hold. I expect, however, that this may shift negatively as LTD may fail to capture robust sales during Christmas 2011 as many consumers may pass on personal products amidst weak employment and earnings. This may reflect in their fourth quarter earnings report in 3 months from now and in turn reflect negatively on LTD's market price.
Overall, with a PE ratio (ttm) of 15.4 compared to the Industry average of 15.4 and a price-to-book of 20.5x there is not much to look for in the short term. The market price is over-appreciated but the dividend will hold.
I recommend LTD shares as a SELL during the next two quarters.
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