Limited Brands Inc. (LTD) beat both its own expectations and Wall Street estimates for the second quarter and raised its guidance for the full year, despite a sharp drop in earnings. Then the parent of Victoria's Secret, Henri Bendel and Bath & Body Works warned that next quarter's results will be pretty grim.

The company reported net income of $74.3 million for the second quarter, down 27.1 percent from the same period last year. Earnings totaled 19 cents per share, which comfortably beat the analysts' estimates, but were 29.6 percent below last year's quarter.
Sales for the company were down 9.5 percent to $2.07 billion, and comparable store sales were down 9 percent. Management warned that the third quarter will likely show a loss of 7 cents to 12 cents per share, compared to one-cent earnings during the same period last year.

Still, Limited Brands raised its guidance for the full year to earnings of between 75 cents and 90 cents per share; that's better than it had predicted when it announced first-quarter results in May. At the time, executives raised their guidance to between 67 cents to 87 per share for the year.

The company decided to withhold details until a conference call tomorrow morning, but the results were not unexpected. Limited Brands has been tightening its belt to deal with slower mall traffic and the need to mark down more merchandise to entice shoppers. Analysts had expected 16 cents per share on revenue of $2.06 billion. Some observers have suggested cuts in advertising at Victoria's Secret may hurt the brand long-term and markdowns meant to drive store traffic would take a chunk out of profits.

It will be interesting to compare Limited Brands' results against tomorrow's report from The Gap (GPS), another big-name apparel retailer. Analysts also expect The Gap to squeak out a win over Wall Street's estimates, but no fireworks.

Most mall-based apparel stores are suffering in this recession and the back-to-school season is shaping up as a disappointment as parents cut back their budgets. And while retailers keep hoping the fourth quarter will mark the start of an economic recovery, consumers are still spooked. Most research shows the holiday season will be no big blazes either.

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