L Brands’ Growth Will Remain Steady Despite Its Online Weakness
The parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB), is scheduled to release its Q2 fiscal 2014 earnings on August 20. In its July sales release, the retailer stated that its comparable store sales improved by 3% and revenues increased by 6% during the quarter. [1] In the preceding quarter, L Brands registered 2% comparable store sales growth with 5% rise in overall revenues. These figures imply that the company has gained some growth momentum after its slump in the holiday quarter. What’s interesting to see here is that L Brands’ comparable store sales are growing steadily even though industry wide foot traffic is falling consistently and consumers are gradually shifting to online channel, where the company hasn’t done too well. Victoria’s Secret’s direct-to-consumer growth has barely been positive and Bath & Body Works’ direct channel still accounts for a very small portion of the company’s sales.
While L brands’ dominance in the niche intimates and personal care markets is driving its growth, there are some market specific aspects that are also helping its results. Due to unusual cold temperatures at the start of the year, retailers such as Gap Inc (NYSE:GPS), Costco (NASDAQ:COST) and L Brands saw significant pent up demand in April and May, which boosted their results. While L Brands’ growth was relatively slow in June, it picked up in July with 6% rise in comparable store sales. With its strong footing in the market, L Brands is exhibiting tremendous resilience against the economic uncertainty in the U.S.
Our price estimate for L Brands is at $63.95, implying a premium of less than 5% to the market price.
See our complete analysis for L Brands
Victoria’s Secret’s Intimates are Driving its Growth
Despite the cautious consumer behavior 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. [2]
Historically, customer response to Victoria’s Secret lingerie and the PINK brand has been very good, and its new lines such as Body by Victoria bras, the New Victoria fragrance, the PINK wear everywhere bra and the 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 it transitioned its focus back to the incredible bra in June, which worked very well for its sales. For July, Victoria’s Secret focused on its “very sexy” collection in lingerie and “back to school” in PINK, which translated into healthy 5% growth in comparable store sales. Overall, the brand’s comparable store sales increased by 3% during the quarter.
Bath & Body Works Remains Steady
Bath & Body Works’ comparable store sales have grown steadily over the past several quarters driven by its strong market position and healthy sales in key categories, namely: the signature collection, the soap & sanitizer business and home fragrances. The company introduces new and seasonal collections for these categories from time to time, which keeps buyers interested in the brand. The brand’s strength can be gauged from the fact that its comparable sales increased by a healthy 7% in July on top of 6% growth witnessed in the same month last year. Overall, Bath & Body Works‘ comparable sales increased by 3% during the quarter backed by strong sales of seasonal collections based on summer and artisan themes. [3]
Online Shift did not Hurt L Brands’ growth
With growing Internet usage and proliferation of smartphones and tablets, U.S. buyers are gradually shifting to online shopping. Over the last two years, store traffic has declined 5% year over year every month, except April 2014, and online sales have grown 15% year over year in every quarter. [4] While this is troubling retailers who do not have a sizable online presence such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), it is driving sales of some apparel players such as Urban Outfitters (NASDAQ:URBN), who have effectively developed their omni-channel platform. L Brands is somewhere in between. While the company’s online business accounts for about 20% of its value as per our estimates, it hasn’t done well lately.
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. Although the brand’s direct sales increased by 6% in June, they rose by a paltry 1% in July.
Although Victoria’s Secret’s online sales were flat during the second quarter, the brand recorded a passable 3% growth in comparable store sales and 6% rise in revenues. This indicates that even though industry-wide store traffic in the second quarter was down as compared to last year, more buyers visited Victoria’s Secrets stores. Also, we believe that growth in Victoria’s Secret’s web traffic was suppressed by heavy promotions in the non-go-forward category.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Notes:- L Brands Reports July 2014 Sales, L Brands, Aug 7 2014 [↩]
- Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012 [↩]
- L Brands’ July Sales Transcript [↩]
- Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩]