Why L Brands’ $1.1 Billion Price Tag For Victoria’s Secret Looks Too Low

L Brands (NYSE: LB) entered into a deal with private equity firm Sycamore Partners recently under which Victoria’s Secret will be separated from L Brands into a privately-held company that is majority-owned by Sycamore. The deal assigns a total enterprise value of $1.1 billion to Victoria’s Secret. Sycamore will purchase a 55% interest in Victoria’s Secret for approximately $525 million, with L Brands retaining a 45% stake in the brand.

Although the deal is a good move by L Brands, we believe that the company has sold the iconic brand for much less than what it is worth. Trefis, in its interactive dashboard, analyzes Why L Brands Sold Victoria’s Secrets At A Discount.

Why do we think the sale was at a discount?

P/S Multiple of the deal is relatively low as compared to L Brands’ Trailing Twelve Months (TTM) P/S Multiple

• L Brands has sold the brand for a total enterprise value of $1.1 billion, implying a P/S multiple of 0.16x (assuming 2019 revenues of $6.9 billion).
• However, P/S multiple of the L Brands for the Trailing Twelve Months (TTM) has been around 0.52. This translates to a 70% discount to L Brands’ TTM multiple.

Moreover, P/S Multiple of the deal is well below the TTM multiple of the competitors

• Additional details about the TTM P/S multiples of the competitors Urban Outfitters, American Eagle Outfitters, and Gap are available in our dashboard

Why Did L Brands Sell The Brand At A Discount?

#1. Lack of Revenue Growth

• Despite contributing the largest chunk of L Brands’ revenues, the brand’s growth has slumped over the last few years.
• Victoria’s Secret has lost nearly $400 million in total revenue since 2016 at an average annual rate of 2.6%,
• Moreover, the segment’s share has declined from 62% in 2016 to less than 56% in 2018 due to faster growth in the Bath & Body Works segment.
• We expect the segment sales would have declined by 6.4% (y-o-y) in 2019 to $6.9 billion due to inferior merchandise performance in loungewear, declines in sports bras, and the exit of the swim business.

#2. Victoria’s Secret Profits Have Tumbled

• Victoria’s Secret operating income has steeply declined over the years, falling from $1.4 billion in 2015 to just $462 million in 2018.
• This has resulted in the brand’s operating margin declining from 18.1% to 6.3% over the same period.
• This decline can be attributed to lower gross margin resulting from increased promotional activity to drive traffic and clear inventory.
• Additionally, this was exacerbated by store impairment charges incurred in 2018.
• The brand has been struggling off lately, and we expect the brand’s profits to take a hit in FY 2019 further.

#3. L Brands’ Ballooning Debt Was Another Major Reason Forcing The Sale

• One of the major reasons that the company was eager to lay off its iconic brand has been its swelling debt. As of 2018, debt was nearly 45% of the company’s total revenues.
• Moreover, as of Q3 2019, L Brands’ total debt stood at nearly $5.6 billion, implying a leverage ratio of 0.74.
• The company stated that it intends to use the proceeds from the transaction, along with approximately $500 million in excess balance sheet cash, to reduce its debt.

What Looks Like A Fair Value For Victoria’s Secret?

• We believe the company sold the brand at a discount. Although the brand was struggling, it had revenues of more than $7 billion in 2018.
• As per Trefis, the brand should have been worth around $1.8 billion, which is nearly 60% more than the current deal value.
• Our methodology assumes FY 2019 revenues of $6.9 billion and a P/S multiple of 0.26. Our P/S multiple assumes a haircut of 50% from the current TTM P/S as we believe that the Bath & Body Works represents a bulk of the company’s valuation.

See all Trefis Price Estimates and Download Trefis Data here

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