L Brands Earnings Preview: Steady Growth To Continue; International & Online Business In Focus
Columbus-based lingerie and personal care giant, L Brands (NYSE:LB), is scheduled to release its Q3 fiscal 2014 earnings on November 19th. In its October sales release, the retailer stated that its comparable store sales improved by 5% and revenues increased by 7% during the quarter. [1] In the preceding quarter, L Brands had registered 3% comparable store sales growth with 6% rise in overall revenues and in the quarter before that, these figures were 2% and 5%, respectively. These figures imply that the company has gained significant growth momentum after its slump in the holiday quarter last year. 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 the online retail channel, where the company’s reliance is limited to just 20%. While Victoria’s Secret’s e-commerce channel hasn’t done too well over the last couple of years, it registered 8% growth in August. We believe that Q3 fiscal 2014 might have marked the resurgence of the brand’s web business. We will have to wait for the earnings call to gain more clarity on this matter.
While L brands’ dominance in the niche intimates and personal care markets is driving its growth, improvement in consumer confidence is also helping its results. With the U.S. unemployment rate and gasoline prices falling, buyers are now more confident in spending on discretionary products. Bath & Body Works‘ comparable store sales surged by 10% in September and 5% in October. At Victoria’s Secret, while October comparable store sales growth remained flat due to warmer-than-usual weather, it recorded 4% growth in this metric in September.
Since L Brands has already reported its sales growth metrics in its October release, we will focus on progress on its growth drivers during the earnings call. The company’s international business has performed very well in the past and it will be interesting how the business trended in the recently concluded quarter. Also, the retailer’s online growth seems to have picked up, which is a good news given that the entire industry is gradually shifting towards omni-channel retailing. The upcoming earnings call will give us a clearer picture of how L Brands managed to revive its online growth.
Our price estimate for L Brands is at $70, implying a discount of about 10% to the market price.
See our complete analysis for L Brands
International Business will be in Focus
Although L Brands’ international operations do not contribute much to its revenues right now, sales trends have been promising. During the second quarter of 2014, the retailer’s international sales had increased by 71% to $79.3 million and its operating income had doubled to $16.9 million. Apart from store expansion, strong same-store sales growth was also responsible for L Brands’ pleasing international results. Martin Waters, president of international operations, had stated during the Q2 earnings call that the company’s growth was evenly spread across all the channels. Victoria’s Secret’s London flagship store was delivering very strong results and its other six U.K. stores were complementing it well. L Brands had plans to open another three stores in the U.K. by the year end. The retailer’s international stores operating in partnership with Alshaya also performed very well in Q2, and it was planning to open another five to seven stores across the Middle East and Turkey during the remainder of the year. We will keep an eye out for progress on these plans.
At the end of Q2, the company had more than 230 Victoria’s Secret’s beauty and accessories franchise stores in international markets, which were progressing very well. It had plans to end 2014 with 300 such stores including nine stores in China. L Brands operated 66 Bath & Body Works stores outside North America at the end of Q2, and was looking to add another 10-20 stores by the year end. It is almost certain the company would have ended its Q3 with a higher store count. It must be noted that all of L Brands formats are performing very well outside North America and the company is expanding them gradually. Their contribution may not be significant at the moment, but it is worth monitoring their performance because they hold tremendous promise for the long run.
Online Growth Might have Picked up
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% in almost every month and online sales have grown 15% year over year in every quarter. [2] 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 had 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 2013 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 and Q2 was somewhat alarming.
However, the brand’s online revenues increased by 8% during August, signalling the possibility of its e-commerce revival. Victoria’s Secret has been gradually phasing out its “non-go forward” apparel category with heavy promotions, that has weighed heavily on its online growth. Sales decline in this category has been around 30% for the past couple of quarters, that has significantly offset the strong growth in “go forward” category. However, there is a possibility that the decline in “non-go forward” category’s revenues might have been less intense towards the later half of the third quarter, which would have bolstered the brand’s overall online growth.
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- L Brands Reports October 2014 Sales And Reiterates Previously Raised Third Quarter Earnings Guidance, L Brands, Nov 6 2014 [↩]
- Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩]