By  on August 19, 2005

NEW YORK — With second-quarter sales up just 3.6 percent, Limited Brands Inc. reported a 23.6 percent drop in the quarter's earnings as apparel sales softened.

The company also forecast full-year and third-quarter earnings that could miss analysts' current estimates. The outlook pushed shares down $1.17, or 5 percent in Thursday trading to $22.11.

While the quarter's results were positively impacted by solid performances at Bath & Body Works and Victoria's Secret, Len Schlesinger, chief operating officer and vice chairman of Limited Brands, said in a conference call with analysts that the company's apparel divisions pulled the quarter down. Express experienced a significant slowdown, but the company described the division as going through a transition.

"Apparel performance continued to be poor, with negative 10 percent comps and a significant decline in operating income, primarily related to Express," Schlesinger said. Comps at Express fell 12 percent in the quarter, while second-quarter same-store sales were down 2 percent at Limited stores.

"Our third-quarter earnings are projected to decline, driven by an increase in SG&A as we invest in operational capabilities to support growth, and by a decline in apparel profitability. While we believe we have taken the right steps to return Express to profitability, the brand will continue to be in transition for some time," Schlesinger explained.

In the three months ended July 30, Limited Brands earned $113.1 million, or 27 cents a share, which compared with earnings of $148 million, or 31 cents, in the year-earlier period. On an adjusted basis, net earnings in the latest quarter fell 17.7 percent from the prior year's $137.3 million, or 29 cents. Total second-quarter sales rose to $2.29 billion from $2.21 billion while same-store sales were flat. Adjusted figures exclude nonoperating gains relating to Limited selling an interest in Galyan's Trading Co. as well as the repayment of a debt note it held over New York & Co.

Limited's per-share results, however, beat analysts' average profit expectation for 24 cents and revenue projection for $2.26 billion.

Year-to-date, net earnings at Limited Brands fell 44.3 percent to $136.2 million, or 33 cents, versus $244.6 million, or 49 cents, in the same period last year. Revenues increased 1.8 percent to $4.3 billion."In women's, significant declines in knit tops and casual bottoms were partially offset by growth in woven pants and tops," said Ken Stevens, chief executive officer of Express, on the call.

"The dramatic deterioration of the [apparel] division has continued for the second straight quarter such that its ‘contribution' year-to-date has now wiped out almost 25 percent of the profits of the other two divisions," Emme Kozloff, analyst at Sanford Bernstein & Co., wrote in a research report released Thursday. "Express continues to struggle to define its customer and to attract those who defected last year."

By division, second-quarter operating income increased at Victoria's Secret and Bath & Body Works. This, however, was offset by a decline in the apparel segment, and the company's "other" segment. Second-quarter consolidated gross margins as a percent of sales fell 150 basis points to 34.6 percent.

Of its lingerie concept Pink, Schlesinger said the company is pleased with the performance and added that the company plans to test "an expanded [Pink] assortment in 46 stores this fall beginning in late October." Schlesinger said Limited Brands "will consider a test of freestanding Pink stores next year after evaluating the results of the expanded assortment offering."

Within Victoria's Secret, the company plans to have 26 Intimissimi lingerie boutiques by the end of this year, and 160 by the end of 2006. A freestanding Intimissimi store will open this October at Easton Town Center located in Limited Brand's hometown of Columbus, Ohio.

In addition, six new Bigelow stores will open within the next two months in Boston, Chicago and New York. And the company said it is identifying locations for additional Henri Bendel stores for construction in 2006.

Regarding August same-store sales, the company expects them to be "slightly negative," driven by softness at Express.

Stevens said the current troubles at Express stem from "continued traffic declines and greater-than-anticipated softness in work wear in the women's business." He added, however, that the company is "aggressively working to fix our assortment issues, including canceling items that have not been well-received and increasing orders on strong performers."

Looking to the third quarter, Limited Brands forecast a loss of 1 cent to a profit of 1 cent. Analysts are expecting a profit of 6 cents.And in the full year, the company said EPS is expected to be $1.36 to $1.38; analysts' consensus estimate is for a profit of $1.40.

Limited Brands added that its board has approved an additional $100 million share repurchase program, following a different $100 million share repurchase program that was completed on Aug. 3. A total of $200 million of shares have been repurchased so far this year.

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