L Brands’ October Growth Beats Estimates But Results Were A Mixed Bag

November 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 October sales results that turned out slightly better than analysts’ expectations. Net sales for the company improved 3% to $700 million and comparable store sales increased 3%, slight ahead of the consensus estimate of 2.5%. [1] Interestingly, Victoria’s Secret’s stores’ comparable sales growth was flat during the month, while Wall Street analysts were predicting the growth to be around 2.4%. However, 5% comparable sales rise at Bath & Body Works, 1.9 percentage points ahead of estimates, helped the company report moderate positive growth during the month. [2]

It is somewhat surprising that despite being the strongest lingerie brand in the country with a history of consistent growth, Victoria’s Secret was unable to register positive growth in October. It appears that with winters approaching, the brand might have invested more in its winter collection. However, the weather turned out warmer than usual, and buyers were reluctant to spend on winter clothing. [3] For Bath & Body Works, much of the growth can be attributed to its dominion in the personal care market. However, an improvement in job market and consumer sentiment in October might have also played a minor part in driving the brand’s sales.

In other news, L Brands announced that the company and some its affiliates have signed an agreement to sell its remaining interest in the third part sourcing business, MGF Sourcing Holdings, to Sycamore Partners for $85 billion. The deal, subject to certain terms and conditions, is expected close in the first quarter of fiscal 2015. We would like to remind investors that L Brands had sold a majority stake in MGF Sourcing Holdings back in October 2011. [1]

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Our price estimate for L Brands is at $70, implying a discount about 10% to the market price.

See our complete analysis for L Brands

Weather Impacted Victoria’s Secret’s Sales, Nothing to Worry About

Ahead of the earnings season, several retailers have warned that warmer-than-usual weather in October could impact their third quarter results. [4] In accordance with the season, a number of apparel retailers had stocked their shelves with winter collection, only to find that a warm October had discouraged buyers to spend on winter clothing. This might have been the case with Victoria’s Secret’s as well, that reported flat comparable sales growth during the month. However historically, Victoria’s Secret has sustained a decent growth rate primarily driven by healthy sales of intimates, and it should be able to recover from this pause in growth in the near future. 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]

Customer response to Victoria’s Secret lingerie and PINK brand has been invariably 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. A slight mismatch in customer demand and store inventory in October isn’t strong enough to put a dent Victoria’s Secret’s growth. The brand should easily bounce back once it re-aligns its merchandise collection with the prevailing weather conditions.


Good Macro-Environment Helped Bath & Body Works

Over the past few months, the macro-economic environment in the U.S. has shown some promising signs, which has encouraged buyers to open up their wallets. The unemployment rate and consumer sentiment have improved significantly during the last three-four months, which has buoyed retail growth. During October, unemployment rate fell to a five-year low of 5.8%, while consumer confidence index rose to its seven-year high of 86.7. [6] [7] This translated into 4% growth in retail sales during the month. [8] However, most of this growth came from the online channel, and apparel retailers who rely on store sales for a bulk of their revenues struggled. Moreover, low demand for winter clothing on account of warm weather added to their problems. On the contrary, Bath & Body Works is less dependent on weather conditions for planning the launch of its merchandise collection. Hence, warmer weather in October did not have a significant impact on the demand for its signature collection, home fragrances and soap and sanitizers. As a result, the brand’s steady growth continued in October, while Victoria’s Secret could only match its last year’s levels.

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Notes:
  1. L Brands Reports October 2014 Sales And Reiterates Previously Raised Third Quarter Earnings Guidance, L Brands, Nov 6 2014 [↩] [↩]
  2. L Brands’ October sales rose more than expected, The Columbus Dispatch, Nov 7 2014 [↩]
  3. October Retail Sale Lukewarm, Unless Store’s Name Is Costco, 24/7 Wall St., Nov 6 2014 [↩]
  4. Specialty Retailers’ Q3, October Sales Not Looking Too Strong, 24/7 Wall St., Nov 3 2014 [↩]
  5. Lingerie Stores In The U.S. Market Research Report, IBIS World, May 2012 [↩]
  6. Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics [↩]
  7. U.S. consumer sentiment at highest since July 2007, Reuters, Oct 31 2014 [↩]
  8. U.S. Retail Sales Rise in October from September – Redbook, Nasdaq, Nov 4 2014 [↩]