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L Brands Sales and Earnings Top Estimates, but Guidance for 2015 Tempered

Victoria’s Secret parent L Brands posted financial performance that topped Wall Street estimates on both the top- and bottom-lines for the fourth quarter and full fiscal year.

Net sales for the three months ended Jan. 31 increased 7 percent to $4.069 billion from $3.818 billion in the prior year quarter. Victoria’s Secret sales, which include PINK and VS Sport, were $2.4 billion, representing 58% of total sales, of which $1.9 billion were in bricks-and-mortar and almost $500 million were in e-commerce and catalog. Bath and Body works represented 34.5% of sales in the quarter, or $1.4 billion.

Comparable store sales for the fourth increased 6 percent.  Comps at Victoria’s Secret rose by 4 percent, while those at Bath & Body Works increased by 8 percent.

Sales of bras, panties, PINK, Sport, beauty and lounge were reportedly up by mid-teens, with bra business across all brand segments (lingerie, sport and PINK) particularly strong.

The quarterly gross margin increased by 210 basis points to 45.1%. The company reported that Victoria’s Secret gross margins were “up considerably.” SG&A expense rose by 13% to $888 million, or 21.6% of sales.

Fourth quarter operating income increased 11% to $957 million from $863.5 million last year. Victoria’s Secret contributed 53% of the total operating income in the quarter, or $507 million, or at a 21 percent operating margin.

Net income increased by 15 percent to $564.8 million, an increase of 15 percent compared to $489.6 million last year. Earnings per share for the quarter increased 15 percent to $1.89 from $1.65 in the prior-year quarter.

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For the full fiscal year ended Jan. 31, net sales were $11.4 billion, an increase of 6 percent compared to $10.8 billion for the previous year. Victoria’s Secret sales were $5.7. Comparable store sales rose by 4 percent, with Victoria’s Secret comps up 3 percent for the year.

Gross margin for the year increased by 90 basis points to 42 percent, and SG&A increased by 6 percent to $2.85 billion, or 24.9% of sales.

Operating income increased 12 percent to $1.953 billion from $1.743 billion in previous year.

Net income in 2014 increased 15 percent to $1.042 billion from $903 million in 2013.

Earnings per share increased 15 percent to $3.50 from $3.05 in the prior year.

The company currently expects 2015 full-year earnings per share to be between $3.45 and $3.65, including earnings per share between $0.50 and $0.55 in the first quarter. For fiscal 2015, comps are expected to be up by a low single-digit rate, with flat gross margins and capital expenditures of between $800 and $850 million, up from $714 million in 2014.

Approximately 70 percent of the capex budget is for real estate and stores, with the remainder slated for investments in technology, logistics, and facilities. The company reported that one of the constraints to sales growth is a dearth of real estate in areas in which it wants to expand or open stores.

At the end of fiscal 2014, the company had a total of 2,969 company-owned stores, of which 1,139 were Victoria’s Secret/Pink (125 of which were stand-alone Pink stores), 1,646 were Bath and Body Works, 10 were VS/Pink in the UK, 145 were La Senza in Canada, and 29 were Henri Bendel. Total net store count increased by 46 during the year and square footage rose by 3 percent to 11,536. The company closed a total of 39 stores during the year, of which 17 were La Senza. Another 60 licensed La Senza stores were also closed. The company expects to open 38 net new stores in 2015 and to close 16 La Senza locations in Canada.

The company is expanding its focus on swimwear, which it has sold for years through its catalogs and which now represents about $500 million in annual sales. The company broadcast its first-ever Victoria’s Secret Swim Special on CBS Thursday night to showcase its collection.

“I believe that this is an opportunity for us to come out strong, to own the spring season,” said Sharen Jester Turney, president and CEO of the brand during a conference call. “We know when we’re in the swim business it drives new customers to Victoria’s Secret which drives new bra customers and that’s what we are after.”