L Brands Q3 FY2016 Performance Remained Dampened Due To Restructuring Activities; Improvements Expected By Mid Next Year

November 18th, 2016 by Trefis Team
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L Brands released its Q3 FY2016 (fiscal year ends in January) results on November 16th and hosted its earnings call on November 17th. The earnings per share for the company declined by 24% year-on-year to reach $0.42. Though Pink and Bath & Body Works showed healthy performances, Victoria’s Secret kept lagging behind due to the ongoing restructuring initiatives. The company’s increased investment in China also put pressure on its performance. L Brands is currently revamping several of its businesses. In Q3, the company’s gross margin declined by ~183 basis points to 39.7% due to the dampened merchandise margin rate. This trend is expected to continue over the next quarter as well as the spring of FY 2017. However, towards the second half of FY 2017, there is an improvement expected in the gross margin and the merchandise margin rates.

Q3 FY16 earnings reports

Some of initiatives undertaken by the company so far, resulting in the current setback are:

  • Victoria’s Secret’s core business would henceforth exclude shoes, swimwear, accessories, and apparel and the shedding off of inventories is expected to be completed by the end of this year. This category offered annualized sales of ~$525 million in 2015, hence the company is foregoing the gains from these sales currently. The VS business will be segregated into Victoria’s Secret Lingerie, PINK, and Victoria’s Secret Beauty.

  • The Beauty business that had been lagging in performance over the last three years is currently being repositioned. The company is trying to shift its focus from the fantasy beauty products to fine fragrance and high-end body care products.
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key stats Q3 FY2016

Category Wise Performance Highlights:

Victoria’s Secret

  • The restructuring plans are progressing well on track.
  • The digital channel sales grew by 12% Y-o-Y over the third quarter.
  • The teenager’s section, PINK, grew strongly, however, the core bra sales declined.
  • The Beauty division continued to decline due to the ongoing repositioning activities.
  • The merchandise margin continued being dampened due to repositioning activities in Beauty, promotional trials on key categories, and the exit of VS from non-core businesses.

Bath & Body Works 

  • In Q3 FY16, Bath & Body Works continued to increase year-over-year sales and earnings over the record growth last year.
  • The merchandise margin rate remained flat compared to Q3 FY15.
  • The brand is gearing up with new releases for the upcoming holiday season.

International 

  • L Brands biggest sales region abroad is the Middle East and Turkey which remained under pressure due to political and macroeconomic unrest, and reduced tourism.
  • Travel 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 revenues for the quarter, however it resulted in a decline of the operating income. After adjusting for China, the increase in revenues and operating income would have been 4% and 14% year-on-year, respectively.
  • L Brands opened 32 new stores internationally in the third quarter.

Outlook For Fiscal Year 2016

The company expects its full fiscal year 2016 EPS to remain between $3.56 to $3.71 and its comparative store sales to increase slightly by low single digits. The gross margin is expected to decline from last year’s 42.8%. Finally, the free cash flow is expected to be around $600 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