How Much Will Recent Divestitures And Changing Consumer Preferences Affect L Brands’ Q1 2019 Results?

LB: La Barge logo
LB
La Barge

L Brands (NYSE: LB) is expected to announce its Q1 2019 financial results on May 22, 2019, followed by a conference call with analysts the next day. The company has been witnessing soft sales growth over the last couple of quarters due to stiff competition and consumers’ changing preferences. LB is expected to witness a revenue decline of 2%-3% in Q1 2019 compared to Q1 2018. Lower revenue is likely to be driven by decreasing sales from its PINK brand and loss of revenue from divestiture of La Senza and Henri Bendel. However, on a sequential basis, the revenue decline is expected to be significant, mainly due to seasonality factors as Q4 accounts for about one-third of the full year sales due to the holiday season. Additionally, the company is expected to report a sharp decline in earnings, driven by a reduction in merchandise margins, higher occupancy costs, higher wage rate, and inflation-related pressure.

We have summarized the key expectations from the announcement in our interactive dashboard – How is L Brands expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Trefis Consumer Discretionary Services data.

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A Quick Look At L Brands’ Revenue Sources

LB reported total revenue of $13.3 billion in FY 2018. The key revenue sources are:

  • Victoria’s Secret North America: $7.4 billion revenue in FY 2018 (55% of total revenue). The segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names, in US and Canada.
  • Bath & Body Works North America: $4.7 billion revenue in FY 2018 (35% of total revenue). The segment sells body care, home fragrance products, soaps and sanitizers under the Bath & Body Works, White Barn, C.O. Bigelow, and other brand names.
  • Victoria’s Secret and Bath & Body Works International: $0.6 billion revenue in FY 2018 (5% of total revenue). This segment includes company-owned and partner-operated stores located outside of the U.S. and Canada, as well as the online business in Greater China.
  • Other Revenue: $0.6 billion revenue in FY 2018 (5% of total revenues). This includes sourcing and production functions, online and store apparel operated by partners, and other corporate functions. Two primary brands (La Senza and Henri Bendel) were divested in Q4 2018.

A] Revenue Trends

Victoria’s Secret North America

  • Revenues were volatile throughout 2018 due to the seasonality factor and lower merchandise sales led by a decline in sales of the PINK brand.
  • Though revenue was significantly high in Q4 2018, it remained almost flat on a y-o-y basis.
  • We expect the segment sales to remain stable (y-o-y) in Q1 2019 due to inferior merchandise performance in loungewear, and declines in sport bras, due to category resets.

Bath & Body Works North America

  • This has been the most stable segment for the company, with growth in recent quarters being driven by growth in comparable store sales.
  • We expect revenue to increase (y-o-y) in Q1 2019, driven by strong sales in most categories including home fragrance, body care and soaps and sanitizers, led by newness, innovation, and fashion.

Victoria’s Secret and Bath & Body Works International

  • Revenue growth over recent quarters was driven by opening of new company-owned Victoria’s Secret stores, direct channel growth in Greater China and additional stores opened by LB’s partners, partially offset by declines in the Victoria’s Secret Beauty and Accessories travel retail business.
  • We expect Q1 2019 to see healthy revenue growth from the international segment due to higher sales from its partners and strong demand in China.

Other Revenue

  • Segment revenue has been increasing through 2018.
  • However, we expect revenues to decline sharply in Q1 2019 compared to Q1 2018, driven by the adverse impact of divesting the La Senza and Henri Bendel brands, two large revenue contributors for the segment.

B] Expense Trend

Increase in total expenses was driven by higher cost of sales, lower merchandise margins, higher occupancy costs, and higher wages through 2018, along with losses from divestitures in Q4 2018.

  • Cost of Goods Sold, Buying & Occupancy Costs: Cost largely increased over recent quarters, driven by decline in the merchandise margin rate due to increased promotional activity and the store asset impairment charges, along with higher occupancy charges due to investments in store real estate in Greater China.
  • G&A, Store Operating Expenses: Expense has been steadily increasing through 2018 driven by higher wages, higher selling expenses related to higher sales volumes at Bath & Body Works, and new company-owned stores in Greater China, and severance and other costs related to the Henri Bendel closure.
  • Loss On Divestiture: In Q4 2018, LB recognized a loss of $99 million on the sale of La Senza, primarily related to the recognition of $45 million of accumulated translation adjustments, as well as the loss related to the transfer of the net working capital and long-lived store assets to the buyer.

In spite of higher expenses, margins improved in Q4 2018 due to significantly higher revenue benefiting from the seasonality factor. We expect net income margin to be lower on y-o-y basis in Q1 2019, driven by decrease in revenue, along with higher costs, and inflation-related pressures.

Full Year Outlook

  • For the full year, we expect revenue to decrease by 0.6% to $13.2 billion in FY 2019. The marginal decline in revenue is likely to be driven by loss of revenue from divested brands, ongoing pressure on loungewear merchandise, and changing consumer preferences.
  • Net income margin is expected to decrease from 4.9% in 2018 to 3.6% in 2019, driven by rising cost, contraction in merchandise margins, higher investment in wages, and other cost pressures.

Trefis has a price estimate of $34 per share for LB’s stock. In spite of short-term pressure on the company’s top line and profitability, we believe that the company’s renewed focus on its core brands and initiatives to enhance shareholder returns (the company recently declared its 178th consecutive quarterly dividend to be paid in June 2019) will drive its stock price.

 

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