L Brands’ December Surge Confirms A Bright Future
Following its stellar performance in November 2014, the parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB), recently reported 5% growth in its December revenues to $2.207 billion. The company’s comparable store sales improved 4% during the month, while analysts had expected the growth to be around 3.5%. Overall, the retailer’s holiday sales totaled at $3.29 billion, reflecting a year-over-year improvement of 6%. [1] [2]
Compared to how the overall retail industry performed during the holiday season, this growth figure looks pleasing. However, this is nothing new for L Brands, which has been a leader in the niche intimates and personal care markets for some time now. The company has repeatedly reported steady growth in revenues and comparable sales, with a good control over its merchandise margins. Its stock has gone up by close to 50% over the past year, on account of its strong financial performance and optimistic outlook. We believe that L Brands’ promising run is likely to continue going forward, as it isn’t short on growth drivers.
The company’s commanding position in the lingerie market, built over the years with innovative designing and marketing, is likely to keep Victoria’s Secret’s growth running. Its plans for international expansion can help it cater to a larger customer group in different geographies, where the brand is already very popular, thanks to its supermodels and fashion shows. For Bath & Body Works, its expansive product variety and accelerated growth in the health & personal care market hold immense promise for the long run. It also has enough growth room in international markets, given that it is at a nascent stage outside North America.
Our price estimate for L Brands is at $70, implying a discount of about 15% to the market price.
See our complete analysis for L Brands
Dominance In The Intimates Market
The underlying factor behind L Brands’ success in the U.S. has been its enticing product range, that has invariably resonated well with customers. Victoria’s Secret is the biggest and the strongest lingerie brand in the U.S., and its design team always strives to deliver appealing merchandise. The brand shifts its focus from one category to another almost every month depending on seasons and trends. For instance in November, Victoria’s Secret launched the “very sexy scandalous” collection aligned with its “scandalous” fragrance. Half way through the month, it shifted its focus to “dream angels” collection. [3] In December, the brand was more inclined towards holiday gifting.
This is a small example of how proactive the brand has been with adding newness to its product range. With compelling product quality, Victoria’s Secret has been high on customer satisfaction, which has helped it acquire a brand loyal customer base. Furthermore, the brand’s marketing strategies have to be credited with generating significant buzz among its target customer group. Victoria’s Secret’s supermodels, which it refers to as angels, have played a vital role in building the brand’s niche image. Also, the annually recurring Victoria’s Secret fashion shows have bolstered its brand image, even in those markets where the brand has no presence. This has made venturing into new markets easy for Victoria’s Secret.
A Strong Brand In The Health & Personal Care Market
Through Bath & Body Works, L Brands offers a wide array of products including shower gels, lotions, aromatherapy, antibacterial soaps, scented candles, fragrances and other personal care accessories. Its core categories — home fragrance, signature collection and soap & sanitizer — have been very strong and consistent over the past several years. In fact, the brand’s revenue per square foot has increased from $598 in 2010 to $692 in 2013, primarily driven by strong and steady performance of the aforementioned categories.
The market itself has picked up some pace lately, after a couple of years of slow growth. The health & personal care market grew by 4% in 2011, but its growth slowed down to just 1% and 2%, respectively, in subsequent years. However, for the first 11 months of 2014 (data for December not yet available), the market grew by a healthy 6% year over year, indicating that consumers showed good interest in health and personal care products last year, with some improvement in the macro-economic conditions aswell. In fact, when the US unemployment rate fell to 6.3% in May 2014, market growth moved up to 7% year over year, from 6% year over year in the prior month. In consecutive months, as the unemployment rate gradually moved below 6%, the health & personal market growth stayed above 6% in every month through to November. [4] [5]
As the U.S. employment environment continues to improve in the future, it will positively impact the industries directly dependent on consumer spending. Therefore, we believe that, with a firm focus on its core categories along with gradual improvement in consumer spending on personal care products, Bath & Body Works can deliver solid long term growth.
Progressive International Business
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 increased by 71% to $79.3 million and its operating income doubled to $16.9 million. In the subsequent quarter, these metrics jumped by 34% and 64%, respectively. Apart from store expansion, strong same-store sales growth was also responsible for L Brands’ pleasing international results. Martin Waters, president of international operations, stated that the company’s growth was evenly spread across all the channels.
Victoria’s Secret’s London flagship store continues to deliver very strong results and its other eight U.K. stores are complementing it well. L Brands has planned to launch an additional store in the U.K. by the end of fiscal 2014, which has likely opened. The retailer’s international stores operating in partnership with Alshaya are also performing very well, and it plans to end the fiscal year with seven more stores across the Middle East and Turkey.
Currently, the company has more than 245 Victoria’s Secret’s beauty and accessories franchise stores in international markets, which have been progressing very well. It is on track to end the fiscal year with 300 such stores including nine stores in China. L Brands operates 67 Bath & Body Works stores outside North America, and the count will most likely go up to 85 by the fiscal year end. It must be noted that all of L Brands formats are performing very well outside North America and the company is expanding them gradually. Although they may not be numerous enough to drive the retailer’s results at present, their continued expansion holds substantial promise for the long run.
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Notes:- L Brands Reports December 2014 Sales, L Brands, Jan 8 2015 [↩]
- L Brands Reports November Sales Results, L Brands, Dec 4 2014 [↩]
- L Brands November Sales Transcript [↩]
- Health and Personal Care Stores, United States Census Bureau [↩]
- Unemployment Rate, Bureau of Labor Statistics [↩]