L Brands Reports A Record Third Quarter Performance, Plans On Repositioning Its Beauty Business

L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, released its Q3 2015 earnings on November 18th and the earnings call was held on November 19th. Boosted by a wholesome growth of both the top and bottom lines, coupled with its solid inventory management, the company reported a record third quarter performance. L Brands’ earnings per share increased by 25% year-on-year to reach $0.55. The brand’s ability to connect with the customers on a personal level, to continuously deliver fresh and updated merchandise, and to provide a fascinating in-store experience, had always put its intimates and personal care lines way ahead of its competitors. Currently, L Brands is planning to reposition its Beauty business, similar to the way it restructured its Victoria’s Secret direct business, recently. The company is also strategizing in improving the performance of its La Senza sales.

L Brand’s net sales reflected a 7% year-on-year growth to reach $2.48 billion and its comparable store sales grew by 7%. The sales growth was dampened by 1% due to currency headwinds. ^{[1] [2]}

For the full year, the management has guided to low to mid single-digit growth in comparable store sales and a sales growth which would be 1% higher than the store sales, due to increase in square footage and international sales. The adjusted earnings per share is expected to lie between $3.69 and $3.79. The capital expenditure for 2015 is expected to stand at $800 million and close to three-fourth of it would be invested on real estate and stores.

The company has launched stores in 93 international locations so far, with 29 new locations in Q3 2015. There are a total of 480 international stores currently, and the revenue from this segment grew by 16% in Q3 to reach $92.8 million. In Q4 2015, the company expects to launch 40 new Victoria’s Secret stores and 15 new Bath & Body Work stores in the international segment.

(Image Source: L Brands Investor Update Meeting, Nov 3, 2015)

Plans For Victoria’s Secret And Bath & Body Works In North America

In 2015, Victoria’s Secret square footage growth in North America is expected to increase by 4% due to existing stores’ expansion and 26 new store launches. Bath & Body Works’ square footage is expected to increase by 3%, due to 26 new store openings and 83 remodels. ^[1]

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Performances Of The Two Brands

• Victoria’s Secret

Victoria’s Secret’s total sales stood at $1.6 billion for the third quarter, reflecting an 8% year-on-year growth with the comparative store sales up by 7%. This growth was in comparison to the last year’s third quarter sales which included $36 million worth of apparel sales in the direct channel. Excluding the apparel segment–which the company has completely exited this year–segment sales growth would have increased by an additional 2 to 3 percentage points.

The company’s fresh launches and themed promotions had resulted in double-digit growth in its bra, panty, and loungewear categories. Victoria’s Secret store sales increased by 9% to $1.3 billion. Victoria’s Secret direct sales grew by 4% due to the 20% rise in sales of the go-forwards categories that more than compensated for the exit from the $36 million worth of non-go-forward apparel division. The distortion of the core category is working in favor of the company. ^[1]

• Bath & Body Works

Bath & Body Work’s sales in North America increased by 7% year-on-year to $705 million and the comparative store sales increased by 7%. The growth was a result of increased sales across all its businesses. The fourth quarter holiday theme has been launched currently with special products across the stores. ^[1]

The Restructuring Of Victoria’s Secret’s Beauty Business

Victoria’s Secret’s Beauty business hasn’t witnessed impressive growth over the last three years. Though the company has reduced the real estate space for this business, the business is still worth $1 billion, currently. The brand is moving its focus from the fantasy beauty products to fine fragrance and high-end body care products. Similar to the recent restructuring of Victoria’s Secret direct business, this might give rise to initial hiccups, but the company thinks that this restructuring will result in long-term growth opportunities  for its beauty business. ^[1]

Logic Behind Retaining La Senza 

On being asked about the weak performance of its La Senza business, and when does the management expect it to at least break even, the management noted that this brand is still being developed and so far there has been good progress. La Senza has experienced a sales momentum and will soon reach its target customer base with better-suited products and a tighter inventory. La Senza sales are driven better in the locations where some of the other Victoria’s Secret brands are also located. The logic for retaining La Senza despite the brand lagging behind its more successful counterparts in the lingerie business is that, after the Victoria’s Secret and PINK brands, it is the third most popular lingerie brand in the world and it makes strategic sense to own it, rather than give it up to another competitor. Besides, La Senza sales had lately been dampened also due to foreign currency headwinds. The management has high hopes for the future of this brand. ^[1]

Travel Retail Is A Big Driver For Victoria’s Secret

Travel retail is one of the largest drivers for the growth of L Brands’ international sales. The travel retail is an ideal space for targeting global customers with significant spending power, who love splurging on beauty and accessories. In fact, it is one of the biggest growth channels for premium beauty giants such as Estee Lauder and L’Oreal, as well. According to its management, Victoria’s Secret is currently the largest standalone retail operator in the travel retail space and the future growth path is still impressive. Around one-third of the 342 international stores of Victoria’s Secret is located in airports. The company plans on opening 30 to 40 outlets through the travel retail channel in the next year.

Due to the economic slowdown and political problems across the globe, the business of travel retail has taken a hit over the last six months. However, these are short-term problems and with the momentum gain in travel propensity, like the beauty companies, L Brands’ management thinks that the sales through this channel are poised for impressive future growth. ^[1]

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1. L Brand Q3 2015 Earnings Call Transcript, Seeking Alpha, Nov 19, 2015 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. L Brands Third Quarter Earnings Presentation, Nov 18, 2015 [↩]