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L Brands Earnings Beat Estimates

Retailer's third-quarter profits rise 25.4 percent despite pullback on gross margin.

L Brands Inc., formerly Limited Brands, outperformed profit expectations in the third quarter despite gross margin compression. In the three months ended Nov. 2, the Columbus, Ohio-based operator of Victoria’s Secret, Bath & Body Works and La Senza generated net income of $92 million, or 31 cents a diluted share, 25.4 percent higher than the $73.4 million, or 25 cents, registered in the 2012 period.

The EPS result was higher than the 28-cent profit expected, on average, by Wall Street analysts and also superior to the company’s updated guidance of Nov. 7, when it said it expected to be at the “high end” of its previous forecast for earnings of between 23 and 28 cents a share.

Revenues for the quarter, first disclosed on Nov. 7, were $2.17 billion, 5.9 percent above the $2.05 billion reported for the third quarter of 2012. Comparable-store sales advanced 3 percent. That was led by a 4 percent comp gain at Victoria’s Secret stores, while the Victoria’s Secret Web and catalog business comped down 1 percent.

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Reflecting the promotional climate of the period, gross margin was down 70 basis points in the quarter, to 39.5 percent of sales from 40.2 percent a year ago. However, operating margin, which also reflects selling, general and administrative expenses as well as merchandise margin, rose to 9.7 percent from 9.1 percent.

The firm expects fourth-quarter EPS of between $1.67 and $1.82, including 2 cents from expenses tied to the $500 million in notes issued in October. On average, analysts had expected EPS of $1.83.

“Despite what is expected to be a tough environment, we expect VS and BBW to be winners this holiday season as the brands’ emotional bond with their customers contributes to strong consumer loyalty and helps to insulate them somewhat from the difficult external environment,” wrote Stifel Nicolaus analyst Richard Jaffe in a research note. “Additionally, pre-planned promotions are expected to drive traffic and sales with no impact to margin.”

The company will hold a conference call Thursday morning to discuss its results.

For the nine months, net income rose 21 percent to $413.4 million, or $1.40 a diluted share, from $341.6 million, or $1.15. Revenues increased 5.3 percent, to $6.95 billion from $6.6 billion, and were up 3 percent on a comp basis.