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Limited Quarter: Express and VS Provide No Lift

Limited Brands reported adjusted net income fell 35.2 percent in the first quarter, hurt by softness at Express and Victoria’s Secret.

NEW YORK — Limited Brands’ accountants had a better first quarter than did its merchants.

With Victoria’s Secret not selling enough bras and Express failing to gain traction in the sweater and denim categories, adjusted net income, excluding extraordinary items in this year and last year’s quarters, skidded 35.2 percent to $49.8 million, or 8 cents a diluted share, in the three months ended May 3, 1 cent above consensus estimates but well below the $76.9 million, or 14 cents, registered in the year-ago period.

However, the Columbus, Ohio-based specialty retailer reported a 95.6 percent increase in actual net income to $97.5 million, or 19 cents, versus $49.9 million, or 10 cents, in last year’s quarter with the inclusion of a $79.7 million pre-tax gain — 9 cents on an aftertax basis — from the sale of about half of its interest in Alliance Data Systems. The reported results include a series of gains and charges to reflect the recombination of Limited and Intimate Brands as well as the sale of Lerner New York.

Also hurting Limited Brands’ results in the quarter were a $13 million pre-tax charge because of the early redemption of $250 million in notes, which had a maturity in 2023; and the sale of some of its Mast joint venture at a loss, reducing income by $7 million during the quarter.

Gross margins were down 140 basis points to 33.2 percent, primarily because of softness at Express and Bath & Body Works, while selling, general and administrative expenses increased 10 basis points to 27.3 percent.

Total sales for the quarter were $1.84 billion, a 2.4 percent increase over year-ago sales of $1.8 billion, but declined 1 percent on a same-store sales basis. Total apparel sales slid 3.5 percent to $615.6 million from $638 million and comps fell 3 percent.

By division, Victoria’s Secret stores and beauty registered the sole comp improvement, rising 1 percent, offset by declines at Bath & Body Works, 2 percent; Express, 2 percent, and Limited, 5 percent.

Shares of Limited Brands lost 47 cents, or 3.5 percent, to close at $13.08 in New York Stock Exchange trading Monday, part of a 3.8 percent retreat by the Standard & Poor’s Retail Index. In the past year, Limited’s shares have closed as low as $10.88, on Feb. 25, and as high $22.34, reached last May 20.

Company executives said on a morning conference call that trends should improve at all three brands. In particular, at Express, investments in key items like terry, paratrooper cropped pants, mini T-shirts and a better selection of core styles in denim should lift results, as should a co-branding test with Seven jeans scheduled for the fall. Elsewhere, the semiannual sale at Victoria’s Secret and new product introductions at Bath & Body Works should drive sales in the current second quarter and the second half. As a result, Limited Brands said it was comfortable with the current First Call’s earnings estimate for the second quarter of 16 cents, flat with last year’s quarter, based on a low-single-digit comp increase; a decline in gross margins of about 100 basis points; and some leverage in selling, general and administrative costs.

For the year, Limited Brands reiterated its previous guidance for earnings growth of flat to up 5 percent, versus 99 cents last year and better than the $1.01 predicted by analysts. In addition, it said it plans $375 million in capital expenditures, down from $400 million, mostly because of the reduction of planned 2003 dual gender conversions at Express.

Grace Nichols, president and chief executive of Victoria’s Secret stores, said, “Although our comp results were positive, it was below our expectations.” She noted that the division bra launches, including the new styles in the Angels collection and the Body by Victoria racer-back style, lacked the wardrobing features of last year’s launches, discouraging multiple purchases and generating the somewhat disappointing comp result.

The Express division, according to president Michael Weiss, “got off to a slow start, with a negative 7 percent comp decline in February, but we rebounded and finished the quarter with flat comps for combined March and April period.” He said women’s saw strong growth in knit pants, tops and dresses, offset by declines in sweaters, woven pants and denim.

Weiss said the men’s business had positive comps in the quarter, but was below expectations, as growth in knit tops, denim and woven shirts was offset by weakness in shorts and casual pants.

The dual gender Express stores continued to outperform the balance of the chain in profitability. However, the company said it will delay conversions and is expecting to change 93 stores by year’s end, down from its prior forecast of 112.

Lauren Cooks Levitan, a retail analyst with SG Cowen, said she was pleased with Limited Brand’s financial results, particularly its focus on cost control by focusing on optimizing the store base. Specifically, she said she was impressed with the continued improving productivity levels in the Express dual gender stores.

“[Limited Brands] is one of the few specialty stores that hasn’t taken down second-quarter guidance,” Levitan said. “They came into the year with a conservative set of expectations for the first half and the charges were one-time events. In a small quarter, it is not about how much you are down, but what explains it.”