L Brands Isn’t Short Of Growth Drivers

LB: La Barge logo
LB
La Barge

Earlier this month, the parent company of Victoria’s Secrets and Bath & Body Works, L Brands (NYSE:LB), reported its August 2014 sales results, that easily trumped analysts’ estimates. The company registered 5% growth in its comparable store sales, while the market expected the growth to remain slow at 2.7%. [1] L Brands dominion in the intimates and personal care markets, along with aggressive back-to-school shopping, helped it register robust sales growth in August. However, the brightest spot was that Victoria’s Secret’s stores, direct-to-consumer, and Bath & Body Works merchandise margins improved as compared to last year, which has been a rare occurrence in the U.S. retail market over the past couple of years.

L Brands’ August results indicate how well the company is positioned in an environment where most buyers are concerned about their spending. The retailer was able to beat its own EPS and revenue guidance in the second quarter of 2014 with strong customer response. [2] We believe that the company’s commanding position in the U.S. market, plans for international expansion, and efforts to exceed customer expectations over product designs position it very well for the long run. While the retailer’s direct channel has been a little sluggish lately, due to heavy discounting in “non go forward” apparel category, it is likely to improve substantially going forward, which will add more weight to L Brands’ growth momentum.

Our price estimate for L Brands is at $62, implying a discount of more than 5% to the current market price.

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See our complete analysis for L Brands

International Expansion Shows Long Term Promise

Although L Brands’ international operations do not contribute much to its revenues right now, sales trends have been promising. During the second quarter of 2014, the retailer’s international sales increased by 71% to $79.3 million and its operating income doubled to $16.9 million. Apart from store expansion, strong same-store sales growth was also responsible for L Brands’ pleasing international results. Martin Waters, president of international operations, stated that the company’s growth was evenly spread across all the channels. Victoria’s Secret’s London flagship store continues to deliver very strong results and its other six U.K. stores are complementing it well. L Brands plans to open another three stores in the U.K. by the year end. The retailer’s international stores operating in partnership with Alshaya continue to perform very well, and it plans to open another five to seven stores across the Middle East and Turkey during the remainder of the year.

Currently, the company has more than 230 Victoria’s Secret’s beauty and accessories franchise stores in international markets, which have been progressing very well. It plans to end 2014 with 300 such stores including nine stores in China. L Brands operates 66 Bath & Body Works stores outside North America, and will add another 10-20 stores by the year end. It must be noted that all of L Brands formats are performing very well outside North America and the company is expanding them gradually. Although they may not be strong enough to drive the retailer’s results at present, their continued expansion holds tremendous promise for the long run.

High Customer Satisfaction will Remain the Key

The underlying factor behind L Brands’ success in the U.S. has been its enticing product range, that has invariably resonated well with customers. Victoria’s Secret is the biggest and the strongest lingerie brand in the U.S., and its design team always strives to deliver appealing merchandise. The brand shifts its focus from one category to another almost every month depending on seasons and trends. For instance in August, Victoria’s Secret’s prime focus was on back-to-school collection in PINK, which it transitioned to yoga in September. It launched “simple sexy” and “incredible sports” collections in lingerie is August, followed by the launch of “very sexy fearless” bra and fragrances in September. This is a small example of how proactive the brand has been with adding newness to its product range. With compelling product quality, Victoria’s Secret has been high on customer satisfaction, which has helped it acquire a brand loyal customer base. Same is true for L Brands’ Bath & Body Works, which frequently adds new collections and themes to its core categories.

Online Growth will add Momentum

Victoria’s Secret’s direct-to-consumer growth has been sluggish for the past several quarters due to low demand for apparel, absence of shipping and handling revenues and heavy discounting in “non go forward” category. Its online revenues declined by 1% in both Q3 and Q4 2013, and remained flat in Q1 and Q2 2014. However, online sales increased by 8% in August as high teen increase in sales of “go forward” category offset 30% decline in “non go forward” category.

Going forward, as the company gradually phases out the “non go forward” category, we expect Victoria’s Secret’s online sales to pick up. The gradual online shift in U.S. retail market will also assist the channel’s growth. Over the last two years, store traffic has declined 5% year over year every month, except April 2014, and online sales have grown 15% year over year in every quarter. [3] With growing Internet usage and proliferation of smartphones and tablets, this is likely to continue in the future. According to eMarketer, online sales of apparel and accessories will grow from $45 billion in 2013 to $86 billion in 2018. [4] We expect Victoria’s Secret to remain at the forefront of this growth.

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Notes:
  1. L Brands Reports August 2014 Results, L Brands, Sept 4 2014 []
  2. L Brands Books Higher Profits, Sales, The Wall Street Journal, Aug 20 2014 []
  3. Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 []
  4. US Retail Ecommerce Sales Highest for Computers, Consumer Electronics, eMarketer, Apr 11 2014 []