L Brands Delivered A Moderate Q2, Restructuring Activities Progressing On Track

August 18th, 2016 by Trefis Team
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L Brands released its Q2 FY2016 (fiscal year ends in January) on August 17th. L Brands is currently revamping several of its businesses. In Q2, the company’s gross margin declined by 180 basis points to 38.5% due to the dampened merchandise margin rate. The company’s restructuring operations*** have kept the merchandise margin rate low. Victoria’s Secret performed moderately, while Bath & Body Works continued growing, the international operations, on the other hand, has received a significant setback due to several macroeconomic problems thwarting growth. Overall, L Brands’ repositioning activities are going strong and the company is expected to deliver better results once those are completed. The company bought back 1.8 million shares in the second quarter for ~$128 million. L Brands has $112 million of its share repurchase remaining under its current $500 million repurchase program.

q2fy16earnings metrics1

Victoria’s Secret Repositioning Activities On Track

  • The restructuring plans have been implemented and so far the progress has been satisfactory
  • The digital channel sales grew by 8% Y-o-Y over the second quarter.
  • The teenager’s section, PINK, grew by double digits while in Victoria’s Secret core lingerie – bras, panties, and sports bras grew by low single digits.
  • The Beauty division continues to decline due to the ongoing repositioning activities.
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Bath & Body Works Continued Growing Over The Record Growth Last Year

  • In Q2 FY16, Bath & Body Works continued to increase year-over-year sales and earnings over the record growth last year.
  • The merchandise margin rate grew slightly as it was negatively impacted by the weak Canadian exchange rate.
  • The BBW Direct grew by 21% Y-o-Y in Q2 FY16.

International Problems Were Manifold

  • L Brands biggest sales region abroad is the Middle East and Turkey which remained under pressure due to political and macroeconomic unrest.
  • Travail retail sales have been adversely impacted by the decline in travel by consumers in Russia, the Middle East, and China.
  • The weak foreign exchange rates against US dollars continue dampening international sales.
  • The recognition of China as a new company owned business did increase sales for the quarter, however it decreased the operating income.
  • L Brands opened 22 new stores internationally in the second quarter.

***Some Of The Restructuring Operations Going On So Far

  • Victoria’s Secret’s core category is shedding off inventories from its non-core businesses such as swimwear, shoes, and accessories. These items were so far offered through the digital channels (and not in stores) and had annualized sales of ~$525 million in 2015. The VS business will be further categorized into Victoria’s Secret Lingerie, PINK, and Victoria’s Secret Beauty. These divisions will be managed by separate executives who will report to the CEO.
  • VS has reduced its total headcount by 290 recently.
  • The weak performing Beauty segment is being repositioned by shifting focus from the fantasy beauty products to fine fragrance and high-end body care products.
  • The international business that had remained dampened due to macroeconomic setbacks, weak international exchange rates, and reduced travel retail spending, is now being given a local business for Victoria’s Secret in China, which will help deal with issues related to international transactions.

q2fy16earnings metrics2

Outlook For Fiscal Year 2016

The company expects its FY16 EPS to remain between $3.70 to $3.85 and its comparative store sales to remain flat or increase slightly. The gross margin is expected to decline from last year’s 42.8%. Finally, the free cash flow is expected to be between $600 million to $700 million.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for L Brands