L Brands Gets It Right Again In January
The parent company of Victoria’s Secret and Bath & Body Works, L Brands (NYSE:LB), reported its January sales results earlier this month and raised its Q4 profit guidance, boosted by strong growth in revenues during the month. The company reported net sales of $783 million for the four-week period, reflecting a year over year increase of 7%. L Brands’ comparable store sales increased by 7%, which was way better than what analysts had expected (2%). Along with its sales release, the retailer raised its Q4 EPS guidance to $1.78-$1.80, from its earlier outlook of $1.61-$1.71. The revised guidance was even better than the consensus estimate of $1.77. [1] Since the announcements, L Brands’ stock has been up by almost 10% and is currently trading at a record high of $94.
Along with its January results, L Brands reported 7% rise in its Q4 revenues backed by a successful holiday season and strong performance during the January semi-annual sales. Its comparable store sales for the three month period increased 6%, which was again better than the street consensus. Victoria’s Secret’s comparable store sales for the fourth quarter increased 4%, topping expectations of 1.9%. At Bath & Body Works, growth was much stronger at 8%. Encouraged by this performance, L Brands announced a special dividend of $2 per share and also increased its annual dividend to a similar amount.
Our price estimate for L Brands is at $70, implying a discount of about 25% to the market price.
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L Brands had a very successful January semi-annual sales this year, as it reported significant increase in revenues as well as merchandise margins. Victoria’s Secret’s comparable store sales during the month increased 4%, driven by strong full-price selling. What makes this growth look even more impressive is the fact that the brand had a very tough comparable period (10% increase in January 2014). However, the brand’s direct channel continued to underperform as it reported 4% decrease in revenues, due to heavy discounting of obsolete products. Sales of non-go-forward apparel declined in high 90 percent range, more than offsetting mid-teens rise in go-forward category sales. However, merchandise margins improved on account of shift in sales mix in go-forward category.
Victoria’s Secret’s growth is being driven by a strong image in the U.S. apparel market, its expansive and enticing lingerie variety, and its appealing marketing centered on supermodels and fashion shows. During January, apparel and accessories sales in the U.S. increased by just 2.7% year over year, despite the significant fall in gasoline prices, that left buyers with a higher discretionary budget. We believe that the niche lingerie market would have performed much better than the overall apparel industry, with Victoria’s Secret leading the charge.
At Bath & Body Works, January comparable store sales increased a massive 16% driven by a surge in full price sales during the January semi-annual sales. The brand’s key categories — home fragrances, soap & sanitizers, and its signature collection — all sustained their strength during the month and contributed substantially to its growth. While the overall health and personal care industry grew by 7% during the month, Bath & Body Works was clearly among the best performers as it has been over the past several quarters. The brand adds new products to its core categories every month, which keeps buyers interested and subsequently, drives growth.
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Notes:- L Brands Reports Record Fourth Quarter Sales, L Brands, Feb 5 2015 [↩]