L Brands August Sales Grow Steadily With Core Segment Focus Reaping Benefits

LB: La Barge logo
LB
La Barge

L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, reported its August 2015 sales on September 3rd. Driven by a strong demand for its Victoria’s Secret intimates and the PINK ‘Back to School’ line of products, the Victoria’s Secret range of products showed healthy sales growth for the month. The Victoria’s Secret direct division is also gaining from focusing only on the ‘core’ merchandizing products. L Brands’ fragrance and personal care brand, Bath & Body Works, demonstrated sturdy performance as usual. Overall, except for a couple of points decline due to the shift of Labor Day to September and the impact of weak Canadian exchange rates, the company displayed robust year-on-year growth in August.

L Brands’ net sales increased by 6% to $826 million driven by a 6% growth in comparable store sales. The growth was partially offset by one or two points due to the shift of Labor Day into September. The August merchandise margin rate was up from last year and the inventories per square foot witnessed a 2% year-on-year growth. [1]

L Brands has been historically performing well in both its personal care and intimates division due to its strong footing in both the segments. The main growth drivers for the company have been the popularity and aspiration values of its Victoria’s Secret merchandise and its marketing and strength in Bath & Body Works’ core categories.

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Our price estimate for L Brands is at $87, marginally lower than the current market price.

See our complete analysis for L Brands

Victoria’s Secret Grew On The Back Of Launching New Collections And Focusing On Core Categories

The August comparable store sales for Victoria’s Secret increased by 6% over the 5% growth last year, boosted by the strong performance of Victoria’s Secret bras and the ‘Back to School’ line of products launched by PINK– its clothing line for teens. The merchandise margin rate experienced a slight decline from last year because of the weak Canadian foreign exchange rates.

Victoria’s Secret’s fresh monthly themes and collections had been one of the secrets behind its success. The brand’s wide collection of merchandise provides it with the option of new launches every month. For example, in the beginning of September, Victoria’s Secret will focus on T-shirt bras and PINK campus pants and by the middle of the month its focus will shift to ‘So Obsessed’ push-up bras and PINK gym pants.

In its recently held Q2 2015 earnings call, Victoria’s Secret’s management spoke at length about the Victoria’s Secret direct’s exit from the apparel category. Victoria’s Secret’s direct-to-consumer business had been faltering for 2013 and 2014 because of the underperformance of its apparel division and absence of shipping and handling revenues. The apparel industry slowed down during these periods due to changes in consumer spending patterns and Victoria’s Secret’s apparel sales also suffered, even though its intimate product sales were growing steadily as usual. As a remedial measure, the company started categorizing its products into “go forward” and “non go forward” categories and started clearance sales for the latter category. Though, by exiting the category, the company gave up almost $350 million in sales and experienced significant dampening of its gross margins, L Brands believes that its long-term growth prospects have been enhanced by this decision.

Victoria’s Secret’s direct channel is currently focusing on strategies that will ensure more efficient usage of its resources, maximize its customer engagements, and improve profitability. Towards this end, it has restructured the core category and has given up on its peripheral businesses, such as makeup and apparel.

Victoria’s Secret direct has started reaping the benefits on focusing on its core category. It displayed growth in the second quarter of 2015, though operating margins needed to recover further. Its August sales witnessed a 2% increase due to the mid-teen growth in its core categories, which more than offset its exit from the apparel division. The August merchandise rate also witnessed a significant growth over last year due to the focus of product mix to the core merchandise category.

Bath & Body Works’ Solid Growth Was Further Boosted By Delay In Promotional Activities

The August comparative store sales for Bath & Body Works increased by 5% on a year-over-year basis (over the 4% growth of last year). The merchandise rate witnessed solid growth due to the shift of Labor Day promotional activities into September. The Bath & Body Works stores will start displaying the ‘Jump into Fall’ theme in September. The U.S. health and personal care market size is estimated to be over $300 billion in 2015 and is growing steadily [2]. We believe that this will further boost the sales of Bath & Body Works in the future.

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Notes:
  1. L Brands Reports August 2015 Sales, L Brands, September 3, 2015 []
  2. How e-commerce is finally disrupting the $300 billion a year health and personal care industry, Business Insider, April 23, 2015 []