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L Brands Inc (LTD): What Is Victoria’s Secret When It Comes to Investing?

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To be honest, it’s slightly embarrassing to be talking about the world biggest lingerie company. Still, I can’t help but like the company. You see, a couple weeks ago I decided to buy my girlfriend Pink yoga shorts, and let me tell you–she was stoked. Maybe there’s some magic behind the Victoria’s Secret brand.

L Brands Inc (NYSE:LTD) reported a fairly solid quarter. The management team plans on moving its “Pink” brand from its Victoria Secret stores into separate stores, while remodeling and expanding the square footage of pre-existing Victoria Secret stores in order to maximize profitability. The company’s management team expects improvement in profit margins as long as the company manages operations effectively for the rest of the year.

Earnings highlights

L Brands IncL Brands Inc (NYSE:LTD) reported earnings per share of $0.48 for the first quarter of 2013. The company grew its earnings by 17% year-over-year. Analysts on a consensus basis were anticipating the company to generate earnings of $0.46 per share. The company beat on analyst estimates by $0.02. This was phenomenal for a first quarter, especially considering that the first quarter is generally the slowest season for fashion retail.

The company reported a 5% gain in net sales year-over-year while revenues increased by $114.2 million. It also reported a 4% increase in store operating expense, as well as a 5% decline in interest expenses and other expenses. Fashion retail is known for having large revenues but low net-profit margins. The 17% gain in net income was driven by costs growing at a similar rate to revenue. Because revenue is a much larger number than store operating expenses, any incremental gain in revenue will contribute significantly to net income.

Company guidance

The company provided guidance for the full year at $2.95 to $3.15. Analysts on a consensus basis anticipate L Brands Inc (NYSE:LTD) to report earnings near the upper-end of its guidance at $3.14. The optimism on Wall Street is driven by consumer sentiment, along with growing disposable income figures.

Source: Ycharts

Over the past five years, personal disposable income has increased by 5.20% and consumer sentiment has increased by 38.13% during the same period. The gain in consumer sentiment is backed by personal confidence and the increase in income, so not only do people want to spend more but they also have the additional funds to do so, which is good.

Favorable environment means retailers in general are strong buy opportunities

Any serious investor should take a closer look at Abercrombie & Fitch Co. (NYSE:ANF). The company’s growth is driven by the strong economic environment, international expansion, and brand extension through its Hollister & Co. and Gilly Hicks lines. The company is projected to grow its earnings by 20.30% in fiscal year 2013, and analysts on a consensus basis also anticipate the company to grow earnings by 17.06% on average over the next five years. The company’s 18.5 earnings multiple is reasonable based on its high rates of growth.

Another opportunity investors should consider is Lululemon Athletica inc. (NASDAQ:LULU), a spandex company that sells high-end yoga spandex. Somehow, yoga managed to blow up into a full fashion trend. Regardless, the company is expanding aggressively into markets like Hong Kong, London, and Paris where demand is driven by tourism. Analysts on a consensus basis expect the company to grow its earnings by 23.20% on average over the next five years.

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