L Brands May Sales Beat Estimates As Favorable Weather Drives Store Traffic

June 12th, 2014 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, recently reported its May sales results that were slightly better than analysts’ expectations. [1] Comparable sales improved by 3%, net sales rose 4% to $763 million, and the merchandise margin remained flat as compared to last year. Victoria’s Secret‘s comparable store sales increased 2% driven by continued strength in intimates and PINK. Interestingly, its merchandise margin improved from last year due to fewer promotional activities, even when the entire retail market in the U.S. was highly promotional. However, Victoria’s Secret’s direct channel continued to disappoint as demand for its apparel (clothing other than intimates) remained low, and it ushered heavy markdowns to clear the inventory of discontinued products. This weighed heavily on the segment’s merchandise margins as well. At Bath & Body Works, comparable sales improved 5% and merchandise margin was flat. [2]

While L Brands’ dominance in the intimates and personal-care markets helped its results in May, an increase in store traffic on account of better weather conditions also had a positive impact. Since many customers were unable to complete their store shopping during the first three months of 2014 due to bad weather, they shopped more aggressively in April and May. This boosted sales of several retailers such as Gap Inc (NYSE:GPS), Costco (NASDAQ:COST) as well as L Brands.

Our price estimate for L Brands is at $63.95, implying a premium of about 10% to the market price.

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See our complete analysis for L Brands

Good Market Conditions In May Boosted U.S. Foot Traffic

After a slump in the first three months of 2014, sales trends in the U.S. ameliorated notably in April and continued to improve in May. The U.S. witnessed a harsh winter season this year, which kept many buyers away from stores. This resulted in significant pent-up demand that eventually boosted retail sales growth in April, when weather became suitable for store shopping. According to consulting firm AlexPartners, a lot of pent-up demand was unmet even after strong sales in April, which helped retailers such as L Brands realize strong sales in May. [3]

In addition to improving weather conditions, a better job scenario also encouraged consumers to spend more on discretionary products. U.S. employers added about 217,000 new jobs in May, which was the fourth consecutive month of significant job gains. Monthly job growth for the last three months now averages at 234,000, significantly higher than the average monthly gains from the prior three months (150,000). [4]

Victoria’s Secret Strength In Niche Intimates Market Helped Its Sales

Despite the edgy retail environment in the U.S., Victoria’s Secret has sustained a decent growth rate primarily driven by healthy sales of intimates. Victoria’s Secret is the strongest brand in the niche intimates market and it has exploited its dominance to good effect. The brand holds more than 35% share in the $12 billion+ intimates market, which is somewhat resilient to unfavorable economic headwinds and isn’t as competitive as the casual apparel market. [5]

Historically, customer response to Victoria’s Secret lingerie and PINK brand has been very good, and its new lines such as Body by Victoria bras, New Victoria fragrance, PINK wear everywhere bra and fabulous bra have been well-received. The brand has efficiently taken advantage of consumer excitement around special occasions such as Valentine’s Day and Women’s Day. During May, the brand focused specifically on a heavenly fragrance for Mother’s Day and later, it transitioned its focus back to incredible bra, which worked very well for its sales.

However, Apparel Sales Remain 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 to bring in more customers. Although 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, the flat sales result in Q1 was somewhat alarming. This trend continued in May, as direct revenues fell by 10% primarily driven by clearance sales of obsolete products. During the month, Victoria’s Secret ushered heavy markdowns to clear non-go-forward apparel inventory, which resulted in 30% revenue decline in this category. While most of direct-to-consumer revenue decline may be attributed to non-go-forward category, go-forward category also declined in low-single digits, which is a worry for L Brands. [6]

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Notes:
  1. L Brands Up As Comps Surge, Zacks, Jun 9 2014 [↩]
  2. L Brands Reports May Sales, L Brands, Jun 5 2014 [↩]
  3. Weather, Discounts Boost May Retail Sales, The Wall Street Journal, Jun 5 2014 [↩]
  4. U.S. Adds 217,000 Jobs In May, Unemployment Rate Remains At 6.3%, Huffington Post, Jun 6 2014 [↩]
  5. Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012 [↩]
  6. L Brands May Sales Transcript [↩]