Fueled By The Continued Success Of Both Its Brands, L Brands’ December Sales Show Record Growth

January 11th, 2016 by Trefis Team
LB: La Barge logo
LB
La Barge

L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, is back with yet another impressive performance. The company delivered its best December sales performance, so far. On January 7th, L Brands announced net sales of $2.42 billion for the five weeks ended Jan. 2, 2016 reflecting a 9% year-on-year growth. Its comparable store sales grew by 8% year-on-year, during the same period. [1] [2] Driven by the robust demand of its core brands, lingerie PINK, personal care, and home fragrance products, the company has been significantly outperforming the S&P 500 and Dow Jones indices since September 2015. Victoria’s Secret’s and Bath & Body Works’ fresh new themed collection every month, coupled with the company’s customer centricity are the two main factors boosting the company’s continuous success. The retailer is not only a favorite brand in the U.S., its international appeal has also been unscathed despite macroeconomic problems and weak currencies.

Our $89 price estimate for L Brands is at close to a 5% discount to the current market price.

Victoria’s Secret Keeps Wowing Its Clientele

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The holiday sales surge along with the continued traction for its Core, Lingerie, and PINK categories led Victoria’s Secret to deliver a 8% year-on year growth in comparative store sales. This was achieved on top of the 3% rise for the same period last year. The only factor weighing down Victoria’s Secret’s retail sales were the declining sales in the Beauty business as this category is currently being repositioned.

In its Q3 2015 earnings call, the company’s management spoke about the restructuring initiatives. The decision was a result of the absence of significant growth in the Beauty business over the last three years. Even after the company cut-down the real estate space for this business, the business is still worth $1 billion in recent times. The brand is trying to shift its focus from the fantasy beauty products to fine fragrance and high-end body care products. In line with the restructuring of Victoria’s Secret’s direct business in 2014, this might lead to setbacks in the short term, however, the company thinks that this restructuring will result in long-term growth opportunities  for its Beauty business. [3]

The sales for December were positively impacted by the earlier start date of its semi-annual sales for this year. The semi-annual sales started right after Christmas and will continue till the middle of January. However, these sales dampened the merchandise margin to some extent, though this was in line with management expectations. Another important reason for declining merchandise margin was the weak currency impact of the Canadian business.

Sales for the Victoria’s Secret Direct business rose by 14% due to the growth in demand for its bras, sports bras, PINK brand, and panties. The merchandise margin also went up as compared to last year. Victoria’s Secret direct is witnessing steady growth every consecutive month. After the company exited its $350 million but poor performing apparel division in 2014, the core category was restructured to sacrifice the peripheral businesses such as makeup and apparel. The company witnessed dampened gross margins as a result, but believed that its long-term growth prospects have improved.

 

Bath & Body Work Grew Despite Being Weighed Down By Weak Canadian Business

Bath & Body Works December comparative store sales increased by 6% over the 5% growth witnessed last year. Though partially offset by the unfavorable exchange rates in Canada, the merchandise margin also grew from the last year.  After the semiannual sales, the brand aims to focus on new spring-themed collections in its signature, home fragrance, and soap and sanitizer business.

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Notes:
  1. December Sales Press Release, L Brands Investor Relations, Jan 7, 2016 [↩]
  2. L Brands December Sales Report Webcast, L Brands Investor Relations, Jan. 7, 2016 [↩]
  3. L Brand Q3 2015 Earnings Call Transcript, Seeking Alpha, Nov 19, 2015 [↩]