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
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.
Urban Outfitters, Inc. (NASDAQ:URBN) operates a trendy clothing store chain and is known for having graphic tees and tanks that come in and out of style. Perhaps the advantage of owning a trendy store is that it forces the hipster crowd to shop more frequently to stay in style. Anyhow, analysts on a consensus basis anticipate the company to grow its earnings by 16.70% for fiscal year 2013, and to grow earnings by around 15.32% on average for the next five years. The company trades at a 26.2 earnings multiple which is pretty rich relative to the projected growth, but then again investors are chasing stocks that can consistently out-perform the broader market. This particular stock has rallied by 62% from its 52-week low.
Macy’s, Inc. (NYSE:M) is one of my favorite department store and discount retailers. The company’s paid celebrity endorsement from Justin Bieber along with its safe and stable business model merits investment from yield-seeking investors. The company is known to be an anchor tenant at mall properties all across the United States. Its stores carry products from Ralph Lauren Corp (NYSE:RL), Calvin Klein, Burberry, and Gucci. With a strong portfolio of products, well-designed stores, and a solid marketing strategy, Macy’s, Inc. (NYSE:M) has a competitive advantage. The company is projected to grow by 14.38% on average over the next five years. A 2.04% dividend yield also comes with the package.
Conclusion
Fashion retail in general is a strong investment opportunity. L Brands Inc (NYSE:LTD) has proven that it can deliver upon earnings guidance. Given the favorable economic environment, almost every other fashion retailer has been able to do the same.
Cutting costs, opening more stores, re-modeling stores and effective marketing have been the hallmark of fashion retail growth. Fashion will stay in touch with the times and offer the yield-seeking investor a steady and effective way to out-perform the broader stock market.
The article What Is Victoria’s Secret When It Comes to Investing? originally appeared on Fool.com and is written by Alexander Cho.
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