L Brands’ Growth To Pick Up Slightly In Q1 Following A Lackluster Q4
The parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB), had it rough during last year’s holiday season as its comparable store sales declined by 5% in November and increased by just 2% in December. While weak consumer spending, and a late Thanksgiving and Black Friday weighed on the retailer’s November Results, adverse weather conditions impacted store traffic during December. However, L Brands bounced back in January with a sharp 9% rise in comparable store sales backed by strong sales of Victoria’s Secret’s intimates during the January semi-annual sale. [1] Overall, the company registered moderate growth in its comparable store sales (+1%) in Q4 driven by its strong footing in the niche intimates and personal care market.
During its April sales release, L Brands reported 2% rise in its comparable store sales for the first quarter of fiscal 2014. We believe that the company’s appealing product offerings and enticing marketing campaigns helped it offset the impact of cold weather in early February. It also led the company to raise its first quarter EPS guidance from $0.44-$0.49 to $0.50-$0.52. While store sales were good, Victoria’s Secret’s direct sales remained flat due to weak demand for its apparel (clothing other than intimates). However, Bath & Body Works recorded 18% rise in its direct sales with continued strength in its core product categories. [2] Although the company has released its sales data, we are eagerly waiting for its earnings call scheduled on May 22 (earnings release May 21), for additional information related to underlying performance.
Our price estimate for L Brands is at $63.95, implying a premium of about 10% to the market price.
See our complete analysis for L Brands
Strong Product Portfolio Will Have A Noticeable Impact Amid Better Market Conditions
Historically, L Brands has seen consistent growth in its revenues, driven by appealing product offerings that resonate very well with customers. Even during Q4 fiscal 2013, when the company’s growth was slow by its standards, certain products performed very well. During the fourth quarter of fiscal 2013, Victoria’s Secret emphasized on its “very sexy bra” collection along with VS night fragrance, and focused on holiday gifting. Its core product categories such as bras, PINK, sleepwear and beauty remained strong. For Bath & Body Works, L Brands launched new fragrances, holiday collections, great gifts and the latest seasonal signature collection, “velvet sugar”. While these efforts were valuable for driving store traffic, their impact was tempered by weak consumer spending and adverse weather conditions. However, since conditions were slightly better in the first quarter, L brands’ strong product portfolio was able to drive its results.
After being weighed down by harsh weather and sluggish consumer spending, retail sales in the U.S. rebounded in the first quarter (February-April) of 2014 with renewed consumer confidence and better employment data. Consumer confidence index in the U.S. reached 100 in the first quarter, propelled by better employment data, and rising equity and home prices. [3] Applications for unemployment benefits dropped to their lowest level in more than three months in early March. Labor Department reported a fall of 9,000 in initial claims for unemployment benefits in the first week of March. Average job growth in February and March (195,000) was much better than what it was in the prior two months. In fact, for the first time, jobless benefits applications in early April were at their pre-rescession levels. [4]
Retail sales in February improved marginally by 0.7%, followed by 1.1% jump in March, which was their biggest gain in over 18 months. Once the weather became suitable for store shopping, U.S. buyers were less reluctant to spend on furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods etc. Although market growth slowed down in April to 0.1%, overall growth in the first quarter still looks pleasing. [5]
Victoria’s Secret’s Fashion Show Bolstered Its Brand Image
L Brands quickly recovered from the initial fumble in the holiday season by leveraging its enthralling marketing strategy to renew its connection with the customers. Victoria’s Secret’s fashion show, aired on December 10, helped it garner significant customer attention that eventually boosted its sales in Q4 and Q1. The show featured six themed apparel groupings “British Invasion,” “Birds of Paradise,” “Parisian Nights,” “Shipwrecked,” “Snow Angels” and the “Pink Network.” The Victoria’s Secret Angels (models) displayed the latest lingerie, panties, bras and sleepwear designs. There were also musical performances by Taylor Swift, Fall Out Boy and Neon Jungle. Such fashion shows have been the core of the brand’s marketing historically, and they likely had a positive impact on Victoria’s Secret’s store traffic in the first quarter.
Direct Channel Is A Concern
Victoria’s Secret’s direct-to-consumer revenues declined by 1% in both-Q3 and Q4 fiscal 2013, due to lower apparel sales and the absence of shipping and handling revenues. L Brands introduced free shipping at the start of the year in order to bring in more customers. While it seemed like a valid move, it weighed on the retailer’s e-commerce growth throughout the year. While it was expected that the business would be back on track this year with continued organic growth, flat sales in Q1 is somewhat alarming. During the earnings call, we will closely analyze the factors that impacted Victoria’s Secret’s direct sales in the first quarter to understand why the brand has been unable to take advantage of the boom in online retailing.
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Notes:- L Brands Reports January 2014, Fourth Quarter 2013 and Fiscal Year 2013 Sales, L Brands, Feb 6 2014 [↩]
- L Brands Reports April Sales And Increases First Quarter Earnings Guidance, L Brands, May 8 2014 [↩]
- U.S. consumer confidence rebounds to pre-crises levels in first quarter: Nielsen, Reuters, Apr 29 2014 [↩]
- Bullish U.S. retail sales brighten growth outlook, Reuters, Apr 14 2014 [↩]
- Retail sales slow, but growth outlook still upbeat, Reuters, May 13 2014 [↩]