Specialty retailer L Brands (LB 35.02, -3.93) trades about 10.1% lower this afternoon after Q2 earnings beat expectations as a muted guide now reflects more conservative sales forecasts compared to previous views.
In terms of the current period, results were fairly decent as comps met the company’s guidance at a decline of 8% with the exit from the swim and apparel categories having a negative impact of about 6 percentage points and 9 percentage points to total company and Victoria’s Secret comparable sales, respectively. Earnings beat expectations at $0.48 and revenues were in-line, yet fell 4.7% compared to last year to $2.75 billion.
Notwithstanding the Q2 results, it appears that the guidance seems to be the driving force behind the losses today as LB lowered its FY18 EPS outlook to a range of $3.00-3.20 (below expectations) from $3.10-3.40. Further, LB sees SSS down low to mid-single digits for the year or about flat for the go-forward merchandise categories. The company sees total sales growth of about 3 points higher than comps due to growth in square footage and the addition of a 53rd week.
Q3 guidance seems equally weak as earnings are expected to come in at $0.25-0.30. The comp forecast is also a more conservative flat to low-single digit decline versus the previous view of up low-single digits. On the conference call which management discussed earnings, the company noted that while store traffic particularly at Victoria's Secret, has been challenging, a large part of the decline was related to the exit of swim and a pullback in promotional activity versus last year.
In short, the weak comp guidance seems to stem from traffic challenges overshadowing product innovation (bralettes and structured bras). As the overall retail environment continues to scuffle over brick-and-mortar consumers shifting to online, promotional levels may need to fill in the gaps as competition continues discounting.