What Helped L Brands Surpass Analysts’ Expectations In Q1 2019?

L Brands (NYSE: LB) released its Q1 2019 results on May 22, 2019, with a conference call with analysts the following day.

Performance Snapshot

• L Brands beat market expectations for revenue as well as earnings in Q1 2019.
• The company reported revenue of $2.629 billion in Q1 2019, marking a marginal growth of 0.1% on y-o-y basis from $2.626 billion in Q1 2018.
• Higher revenue was primarily driven by a very healthy growth of 13% in comparable sales at Bath and Body Works, partially offset by a 5% decline at Victoria’s Secret and loss of revenue from the divestiture of La Senza and Henri Bendel.
• However, on a sequential basis, revenue declined significantly, mainly due to seasonality factors as Q4 accounts for about one-third of the full year sales due to the holiday season.
• Earnings came in at $0.14 per share in Q1 2019, much higher than expectations of a break-even, mainly due to record results at Bath and Body Works. However, earnings were lower compared to $0.17/share in the year-ago period, due to reduction in merchandise margins and higher occupancy costs.

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

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

• Victoria Secret’s poor performance has been a drag on the overall results of the company.
• Segment revenue declined by close to 5% (y-o-y) in Q1 2019 due to declining sales in the lingerie division.
• Lower sales are primarily due to lower mall traffic, failure to upgrade the merchandise, and increasing competition from Aerie, Adore Me, Lively, and ThirdLove.

Bath & Body Works North America

• The segment proved to be the savior for the company with revenue growth of 14.5% in Q1 2019.
• Comparable sales increased by 13% during the quarter driven by strong sales in most categories including home fragrance, body care, and soaps and sanitizers, led by newness, innovation, and fashion.
• Additionally, the launch of the Gingham body care and fragrance lines had strong consumer response.

Victoria’s Secret and Bath & Body Works International

• International segment revenue remained flat (y-o-y) in Q1 2019, driven by higher sales from its partners and strong demand in China, offset by declines in the Victoria’s Secret Beauty and Accessories travel retail business.

Other Revenue

• Other revenue declined by 20.6% (y-o-y) in Q1 2019, driven by the adverse impact of divesting the La Senza and Henri Bendel brands, two large revenue contributors for the segment.

B] Expense and Profitability Trend

Total expenses saw a marginal increase of 0.4% (y-o-y) in Q1 2019 due to higher cost of sales, lower merchandise margins, and higher occupancy costs.

• Cost of Sales, Buying and Occupancy: Cost increase was 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: The cost remained flat (y-o-y) in Q1 2019, due to higher wages, higher selling expenses related to higher sales volumes at Bath & Body Works, and new company-owned stores in Greater China, offset by the decrease in other costs related to the Henri Bendel and La Senza sale.
• 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. Absence of this one-time charge contributed to earnings growth in Q1 2019.

In spite of the absence of one-time expenses and flat G&A expense, net income margin declined to 1.5% in Q1 2019, from 1.8% in Q1 2018 and 11.1% in Q4 2018, mainly due to higher cost of sales and an increase in the tax outgo for the quarter.

Full Year Outlook

• For the full year, we expect revenue to increase by 1.7% to $13.5 billion in FY 2019. Higher revenue is expected to be driven by healthy growth in the Bath and Body Works segment, partially offset by loss of revenue from divested brands, ongoing pressure on loungewear merchandise, and changing consumer preferences.
• Net income margin is expected to remain flat at 4.9% in 2019, driven by high operating profits in the Bath and Body Works category, offset by contraction in merchandise margins, higher investment in wages, and other inflation-related cost pressures.

Trefis has a price estimate of $34 per share for LB’s stock. 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.