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Limited's Tough 1st Qtr.: Earnings Fall 76 Percent As Express Unit Falters

First-quarter earnings at Limited Brands dropped 76 percent, as merchandise shortcomings at Express dragged down results.

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NEW YORK — First-quarter earnings at Limited Brands Inc. dropped 76 percent and missed analysts' expectations as merchandise shortcomings at Express dragged down results.

The specialty retailer on Monday also forecast second-quarter and full-year earnings below analysts' projections.

"There's no silver bullet" for Express, Limited chairman and chief executive Leslie H. Wexner said during the annual shareholders' meeting at corporate headquarters in Columbus, Ohio. A "number of fashion judgments have been not as good" as they should have.

Executives said that there were no plans to shed the apparel division, which includes Express and Limited Stores, and that setbacks in sportswear won't impede initiatives in the fast-paced lingerie and personal care divisions. On the agenda: the Pink subbrand of Victoria's Secret will begin opening stores, and Bath & Body Works will soon start selling online and via catalogues.

Limited said net earnings in the quarter ended April 30 fell to $23.1 million, or 6 cents a share, dropping below Wall Street's expectations of 8 cents. Comparatively, Limited earned $96.6 million, or 19 cents, in the first quarter of 2004. Shares closed at $20.45 on Monday, up 0.1 percent in New York Stock Exchange trading.

On an adjusted basis, which excludes a $44.9 million, or 6 cent, pretax gain from the repayment of a New York & Co. subordinated note, Limited Brands posted earnings of $67.8 million, or 13 cents, in the first quarter of 2005; Limited sold New York & Co. to Bear Stearns Merchant Banking in November 2002.

Net revenues in the latest quarter were essentially flat at $1.97 billion, down 0.2 percent from last year's $1.98 billion. Same-store sales in the period declined 5 percent.

Limited said in a statement that it sees second-quarter earnings at 23 cents to 25 cents and full-year earnings at about $1.41. Analysts are calling for 29 cents in the second quarter and $1.50 in the year.

First-quarter operating income totaled $48.3 million, down 59.6 percent from the previous year's $119.4 million. Operating income at Victoria's Secret increased by $6.2 million; Bath & Body Works increased by $7.8 million, apparel operating income declined by $79.2 million.
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Same-store sales in the second quarter are anticipated to be flat. May comps are expected to be down in the low-single digits.

The company completed its previous $100 million share repurchase program and has authorized an additional $100 million share repurchase.

Wexner kept the spotlight on Victoria's Secret and its subbrand, Pink, and bright earnings news for Limited Stores. The introduction of the IPEX bra "will probably be a major volume and income generator for Victoria's Secret" and the in-store brand Pink is being expanded after a successful fall launch throughout Victoria's Secret stores and will emerge as its own store in 2006, Wexner said.

Victoria's Secret and Bath & Body Works account for 70 percent of the sales for Limited Brands, which now considers itself more of a packaged-goods company, as opposed to strictly a specialty retailer. Limited Brands operates 3,699 stores and posted $9.4 billion in sales last year.

With Express a major drag there has been speculation of an apparel spin-off.

Leonard Schlesinger, vice chairman and chief operating officer, said during the conference call: "While we have always in the past demonstrated our willingness to adjust the portfolio in the name of shareholder value and will always continue to do that, that doesn't drive us right now having a specific time frame for the disposition of any of our businesses ... At the moment, we've indicated quite clearly that we have no plans to sell either of those businesses.

That got reaffirmed in the annual report letter from Wexner, who wrote: "Some have suggested to me that we should think about selling both of them. Let me be crystal clear: Express and Limited are not for sale. They both have significant growth opportunities."

Apparently, there's a bigger opportunity at Pink, the more youthful, casual lingerie line launched at VS stores over a year ago. Schlesinger said this fall Pink will test accessories, sportswear, denim, and "pickups" at the cash register in 40 "solution" VS stores as a prelude to opening Pink stores. In-store marketing ideas will be tested, too.

Other growth strategies:

  • Bath & Body Works is working on "full-direct capability to sustain its momentum, and plans to launch e-commerce in October, and a catalogue in 2006. The division is close to completing an agreement with a third party to outsource technology and fulfillment. The outsourcing decision is "driven especially by the fact we want to get into the market quickly," Schlesinger said. "It's not intended to state a strategic direction."
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  • Breathe, a collection of "mood enhancing" fragrance and skin care line, will be launched by BBW in July. Neil Fiske, BBW ceo, called the line an "accessible trade up opportunity and a modern alternative to everyday body care."

  • C. O. Bigelow, Limited's take on a 21st Century apothecary, plans to open six stores in September and October in Chicago's Water Tower Place and the Hawthorne and Woodfield malls; Boston's Copley Place and suburban Northshore mall, and in Garden State Plaza in Paramus, N.J. The prototype debuted in the Easton Town Center near Columbus. As Bigelow rolls out, the key is to maintain differentiation from BBW stores and customers.
  • Last week, Limited bought Slatkin & Co., a force in the home fragrance market. "The integration will happen very quickly beginning this week,'' Fiske said. "We've already mapped out ways this company will be integrated into ours. We already have been working with Harry Slatkin [founder and president] on a consulting basis. We will hit the ground running with his ability to contribute a wealth of ideas to the home fragrance business."

    At Express, comps fell 21 percent and had a higher markdown rate, Kenneth Venner, chief information officer, said on the call. "Growth continued in pants but was more than offset by declines in casual bottoms and knit tops," Venner said. "Selling on crop pants in the first quarter was well below our expectations, driven by color and fit issues. We expect that the second quarter will continue to be challenging for Express, although we are doing everything we can to optimize margins. Our priorities are clearing through underperforming merchandise and fixing our fashion issues by the fall season."

    Emme Kozloff, an analyst with Sanford Bernstein & Co., noted in a report that the quarterly loss at Express "is twice the amount that Express earned in all of 2004, which was half that earned in the prior year." However, "while investors might be clamoring for disposal of the apparel business now more than ever, the value equation is unlikely to work in shareholders' favor given the deterioration in performance. Even if the business was up for sale, it's unclear whether any buyers would be interested for a reasonable price."
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    Lazard Capital Markets analyst Todd Slater said in a report that it would take 24 to 36 months for Express to get back to typical operating margin levels of about 10 percent seen from 1999 to 2000.

    "We're embarrassed by the performance at Express and would like to emphasize that we are very committed to returning the brand to better performance," Schlesinger said. "The Express team, with significant input from Jay Margolis and the rest of the executive committee, are working feverishly to move the business ahead."

    Margolis, former president of Reebok, was hired as group president of apparel in February, as part of a management restructuring.

    Paul Raffin, president of Express, added that a strategy of emphasizing wear-to-work and trading up has not worked. "We got fashion wrong, we drifted older, we drifted more expensive, and in fact alienated a large percentage of our total customers."

    He added, "Wear-to-work can in fact be young and sexy. Wear-to-work and casual balance is the key to effective repositioning. We were getting too old, with a lack of excitement and sexiness, and just turned people off." He added, "We're pragmatic about reducing color and pattern and focusing on black and neutrals.

    In other divisions, VS Stores was roughly flat against a strong year-ago performance, and fell below corporate expectations. VS Direct sales rose 10 percent, with strength in bras, swimwear, woven and knit tops. Internet continues to grow as a percent of sales. VS Beauty, which operates at three U.K. airports, is "actively" considering expansion into Germany and Brazil.

    BBW rose 5 percent, driven by product introduction.

    — With contributions from Brent Wilder, Columbus, Ohio
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