L Brands Q2 FY16 Earnings Preview

August 16th, 2016 by Trefis Team
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L Brands is slated to release its Q2 FY2016 (fiscal year ends in January) results on August 17th. In its July monthly sales and second quarter preliminary results L Brand has demonstrated around 5% topline growth to $2,890 million. The company’s restructuring of Victoria’s Secret’s core category, repositioning the Beauty business, cost saving measures, and changes in international business, are some of the things keeping it busy and hence slowing down its performance to some extent this year. Consequently, L Brands’ stock price has declined by almost 25% year-to-date. However, we believe these are short term setbacks due to the transitioning phase and L Brands will bounce back again in the future. Total company owned L Brands stores stood at 3,052 by the end of July 2016 as compared to 3,005 at the end of January 2016.

The Revamping Of Its Most Important Segment Is The Main Cause For A Performance Slowdown

Victoria’s Secret (VS) Stores is the most important segment for L Brands’ growth. Almost 50% of L Brands’ projected revenues is contributed by the VS stores. Bath & Body Works stores is the second most important segment and contributes around 25% to 30% of future revenues. Since, VS stores are so important, it is precisely the reason why a restructuring of the segment and a layoff of around 300 employees from this division had dampened the company’s stock price. Along with repositioning its Beauty business, VS is shedding off inventories from its non-core businesses such as swimwear, shoes, and accessories which were so far being sold through the digital channel. The non-core business contributed to over $500 million in sales in the last year.

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Some Changes In The International Arena, Too

Lately, L Brands’ international business has been dampened due to macroeconomic setbacks in some geographies, weak international exchange rates, and reduced tourism in high profile cities that dampened sales through travel retail. Hence, L Brands is currently developing a local business for Victoria’s Secret in China, which will help deal with issues related to international transactions. The company had invested ~$4 million in the China business in the first quarter and is currently establishing an L Brands management team in Shanghai.

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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