VALUATION HIGHLIGHTS

1. Bath & Body Works Stores constitute 76% of the Trefis price estimate for Bath & Body Works, Inc.'s stock.
2. Bath & Body Works Direct constitutes 19% of the Trefis price estimate for Bath & Body Works, Inc.'s stock.

WHAT HAS CHANGED?

1. L Brands Posts Stronger-Than- Expected Q3
   • The company posted revenues of $3 billion, up 14% year-over-year (y-o-y), which came in ahead of market estimates by $380 million. In addition, Non-GAAP EPS of $1.13 also easily beat estimates by $1.03 in Q3. Comparable sales soared 28% during the quarter to more than double the +10.3% mark from analysts, led by a sizzling 56% comp from Bath & Body. Evidently, L Brands remains focused on containing costs, managing inventory, and optimizing capital expenditures. The company is on track with its earlier announced profit improvement plan and intends to generate approximately $400 million in annual savings.

2. L Brands Aims to Separate Bath & Body Works Early 2021
   • The company confirmed that it plans to work on separating the Bath & Body Works business sometime early next year. Analysts have been talking up the upside of splitting Bath & Body Works from Victoria's Secret's drag for almost a year. It is also highlighted that demand for Bath & Body Works products remains sky high as it continues to sit as a favored shopping destination (online and stores) for consumers during the pandemic.

3. L Brand sells its under-performing La Senza Brand
   • In January 2019, the company divested its ownership interest in La Senza to an affiliate of Regent LP, a global private equity firm. Moreover, the company closed all of its Henri Bendel stores and the e-commerce website to focus on its two large core businesses: Victoria’s Secret and Bath & Body Works.

4. The several restructuring initiatives undertaken by the company resulted in its lukewarm performance
   • The VS business is now further categorized into Victoria’s Secret Lingerie, PINK, and Victoria’s Secret Beauty. These divisions are managed by separate executives who will report to the CEO.
   • The company is also repositioning its Beauty business since last year, given the weak performance of this segment for over three years. The brand is trying to shift its focus from the fantasy beauty products to fine fragrance and high-end body care products.
   • VS has shed inventories from its non-core businesses such as swimwear, shoes, and accessories, which were so far being sold through the digital channel. Though these businesses generated around $525 million in sales in 2015, the company feels that focusing on its core categories might lead to better growth opportunities in the future.
   • On the international front, macroeconomic setbacks in some geographies, weak international exchange rates, and reduced tourism in high profile cities have dampened sales.

5. Bath & Body Works' steady growth expected to continue
   • Bath & Body Works’ strong growth can be attributed to its core categories: the signature collection, soap & sanitizer products, and home fragrance. Additionally, the U.S. personal care industry has recently performed very well. In 2014, the U.S. market for beauty and personal care reached around $76.3 billion. The market is said to have crossed $80 billion in 2018. Link
   • BBW’s sales grew by 8% in FY 2019, and its comparable sales rose by 10% on top of the 11% of FY 2018. The operating income for this segment grew by 11% y-o-y to reach $1,191 million. Net sales increased in most categories, including home fragrance, body care, and soaps and sanitizers, which incorporated newness, innovation, and fashion.
   • Like its VS business, the company might be thinking of making some changes in this segment as well because the personal care products sales seem to be growing at a slower rate than the management’s expectations.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of L Brands’ value that present opportunities for upside or downside to the current Trefis price estimate for L Brands:

Bath & Body Works Stores

• Bath & Body Works' Revenue per Square Foot: Bath & Body Works’ revenue per square foot increased from $570 in 2009 to $834 in 2016 and around $905 in 2018, as affluent U.S. buyers continued to exhibit strong affinity towards the lingerie giant’s products, even when the macro-economic environment wasn’t conducive. Going forward, we expect revenue per square foot to increase and reach up close to $1,088 by the end of the Trefis forecast period.
  If revenue per square foot crosses to $1,200 instead, driven by Bath & Body Works’ continued dominion in the beauty space, there could be a 12% upside to the Trefis estimate for L Brands. On the other hand, if it falls below $900 due to cautious consumer spending and potential merchandising issues, there can be over 20% downside to the Trefis estimate.

• Bath & Body Works' Stores EBITDA Margin: Bath & Body Works Secret US stores’ EBITDA margin has increased consistently from 18% in 2009 to 26.7% in 2019, primarily due to higher merchandise margins, resulting from fewer discounts. Moreover, steady revenue growth has further supported growth in this segment. Going forward, we expect the figure to decrease in the near term and then stabilize at around 24% over the forecast period.
  If margins increase to 28% by the end of the Trefis forecast period, there could be over 15% upside to the Trefis estimate for L Brands. On the other hand, if it decreases to 20%, there can be a 15% downside to the Trefis estimate.

BUSINESS SUMMARY

L Brands is the parent company of Victoria’s Secret and Bath & Body Works. The company sells lingerie, personal care & beauty products, apparel, and accessories. The company owns the following brands: Victoria’s Secret, PINK, Bath & Body Works, C.O. Bigelow, and White Barn Candle Cobrands.

L Brands is one of the largest specialty retailers in the U.S., with over 2,600 specialty stores nationwide. The company also operates in Canada as well as more than 40 other countries through licensing and franchise agreements. Additionally, the company’s products are sold online.

SOURCES OF VALUE

We believe Victoria’s Secret and Bath & Body Works stores are the largest sources of value for L Brands.

Bath and Body Works stores generate higher revenue per square feet

The average size of Victoria’s Secret store is almost 2.5x that of Bath & Body Works. However, Bath & Body Works’ revenue per square foot is around 30% higher as compared to Victoria’s Secrets. It is the fastest-growing brand with revenue share increasing from 28% in 2014 to ~40% in 2019.

KEY TRENDS

Diversity of Products has Increased

Intimate apparel used to be uniform, with very few differences among products. Style and Fit were consistent across brands with very little diversity. However, over time, many innovations have occurred, leading to more variety and more customized options for women.

Increasing Competition in U.S. Intimate Apparel Industry

Women’s intimate apparel industry in the U.S. has witnessed an increase in competition as more lingerie brands have ventured into this very lucrative business. Many retailers such as Kohl’s and JC Penney have added new lingerie lines and have started offering services such as bra fitters. Other apparel retailers such as American Eagle Outfitters are also offering a wide range of women’s intimates. The heightened competition is a change from the prior two decades when Victoria’s Secret largely had the market to itself.

Effective Merchandising and Marketing Key to Growth in Personal Care & Beauty Market

In the developed U.S. personal care and beauty market, price competition is fierce, brand loyalty is low, and private label is a real threat to manufacturers. The challenge for manufacturers in this category is to offer added benefits that will drive consumers away from budget product lines. With few non-users to convert and limited population growth, the burden of further expansion comes down to marketing efforts and product innovation.

International Business Shows Promise

Currently, L Brands has over 350 Victoria’s Secret beauty and accessories franchise stores in international markets, which have been progressing very well. It plans to increase this figure going forward. L Brands operates around 200 Bath & Body Works stores outside North America. 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 in the long run.