L Brands’ June Same-Store Sales Rise But Miss Estimates
L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, recently reported its June sales results that were unable to meet market expectations. The company’s comparable sales improved by just 2%, while analysts polled by Thomson Reuters were expecting 3.1% rise in this metric. [1] However, L Brands’ results look good considering that June 2014 wasn’t the best month for premium brands. While affordable apparel brands were able to register decent growth during the month, relatively expensive brands struggled. Overall, the company’s sales improved 7% from $1.101 billion in June 2013 to $1.176 billion in June 2014. [2]
Victoria’s Secret‘s comparable store sales increased 3% driven by continued strength in intimates and PINK. Interestingly, its merchandise margins improved from last year while the company’s margins were down. The most pleasing aspects of L Brands’ June 2014 performance was the recovery of Victoria’s Secret’s direct business. Following several quarters of revenue decline, the segment’s sales improved 6% during the month primarily driven by higher sales of go-forward category. However, direct channel’s merchandise margin rate was down due to heavy discounts offered on non-go-forward category. At Bath & Body Works, comparable sales improved slightly by 1% and merchandise margin rate was down as compared to last year.
Our price estimate for L Brands is at $63.95, implying a premium of less than 10% to the market price.
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June 2014 Was Hard On Premium Brands
While retailers who offer affordable products thrived in June 2014 owing to a six-year low unemployment rate, buyers remained cautious with their spending on premium products. [3] Last week, Wal-Mart (NYSE:WMT) U.S. president, Bill Simon, stated that foot traffic in the retailer’s stores was recovering owing to an improvement in the job market. Kroger’s CEO, Rodney McMullen, made a statement in June that shoppers were exhibiting less cautious spending behavior. Warehouse giant, Costco (NASDAQ:COST), recently reported its June sales results with 6% rise in its same-store sales. Affordable teen apparel retailer, Zumiez, reported better-than-expected 3.1% growth during the month. [4] Gap Inc‘s (NYSE:GPS) cheapest brand Old Navy registered 7% rise in comparable sales in June 2014 on top of 13% growth witnessed in the same month last year.
On the other hand, Gap Inc’s relatively expensive brands – Gap and Banana Republic (7% decline), stumbled during the month reflecting weak consumer confidence in the U.S. While the U.S. consumer confidence in June 2014 stood high at 81.2, it was well below June 2013’s figure of 85, which was the highest in over six years. [5] This indicates that L Brands might have also had a tough time in selling its premium products in June. The fact that it still registered 2% growth in comparable sales is encouraging. [6]
Victoria’s Secret Strength in Niche Intimates Market Helped its Sales
Despite the cautious consumer behavior, Victoria’s Secret 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. [7] 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. During June, the brand focused specifically on incredible bra, which worked very well for its sales. For July, Victoria’s Secret will be focusing on “very sexy” collection in lingerie and “back to school” in PINK.
Apparel Comes Out of its Slump
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. However, the brand’s direct channel recorded 6% growth in revenues in June indicating that demand for its apparel is improving. Victoria’s Secret’s non-go-forward category sales declined by 30%, which was more than offset by mid-teens rise in go forward category sales. The future of Victoria’s Secret’s apparel business is looking good considering that its go-forward category is much bigger than its non-go-forward category. [8]
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Notes:- L Brands June Same-Store Sales Growth Falls Shy Of Estimates, Market Watch, Jul 10 2014 [↩]
- L Brands Reports June 2014 Results, L Brands, Jul 10 2014 [↩]
- Labor Force Statistics from the current Population Survey, Bureau Of Labor Statistics, Jul 11 2014 [↩]
- Slowing Customer Traffic Worrying U.S. Retailers, The Wall Street Journal, Jul 10 2014 [↩]
- United States Consumer Sentiment, Trading Economics [↩]
- Gap Inc Reports June Sales, Gap Inc, Jul 10 2014 [↩]
- Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012 [↩]
- L Brands May Sales Transcript [↩]