L Brands Earnings Preview: Holiday And January Semi-Annual Sales To Propel Growth
L Brands (NYSE:LB) is scheduled to report its Q4 and full year fiscal 2014 earnings of February 25th. (Fiscal years end with January.) Note that it has already reported its sales growth figures in a recent press release. The company stated that its Q4 revenues increased by 7% to $4.07 billion, and comparable store sales grew by 6%. For the full year, L Brands reported sales growth of 6% to $10.77 billion and comparable store sales growth of 4%. Parent company of Victoria’s Secret and Bath & Body Works, the company expects its earnings per share for the fourth quarter to be around $1.78-$1.80. [1]
Over the last couple of years, U.S. buyers have scaled back their discretionary spending, but that has not troubled L Brands at all. Its loyal customer base of affluent buyers has shown no reluctance in spending on premium lingerie and personal care items, which has propelled the retailer’s growth. For the fourth quarter in particular, the company’s growth was driven by an extremely successful holiday season and extraordinary customer response during the January semi-annual sales.
Our price estimate for L Brands is at $70, implying a discount of over 20% to the market price.
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During the November-January quarter, the health and personal care market grew by almost 6.3% and Bath & Body Works’ comparable store sales growth may have been well over 10%, considering that its growth metrics stood at 11% and 18%, respectively, in November and January. Overall sales of apparel and accessories increased 3.6% during the quarter, and Victoria’s Secret’s comparable store sales increased 6% in November and 4% in January (figures for December not available). These figures clearly indicate L Brands’ dominion in the apparel and health and personal care markets.
Since L Brands has already reported its sales growth metrics for the fourth quarter and we have discussed its monthly results in previous notes, it seems worthwhile to focus on the company’s long term growth prospects. L Brands’ international business, though not a major contributor to current revenues, has been progressing very well. During the third quarter of 2014, the retailer’s international sales increased by 34% and its operating income grew by 64%. Martin Waters, president of international operations, stated in the previous earnings call that the company’s international growth is evenly spread across all the markets. It will be interesting to see if L Brands sustained its international growth momentum in the fourth quarter as well.
In the U.S., while L Brands’ lingerie and personal care business is flourishing, it is not seeing the same success in its apparel business. Across the industry, U.S. buyers have limited their spending on basic logo apparel and are spending on fast-fashion merchandise instead. Along with other casual apparel retailers, this trend has impacted Victoria’s Secret’s apparel business as well. In response, the brand has categorized its apparel inventory into “non go forward” and “go forward”. As the name suggests, the company is aggressively discounting its non-go-forward merchandise to clear off the inventory and make way for better products, which we believe will be more in-line with the prevalent customer taste. This discounting has weighed heavily on Victoria’s Secret’s direct channel growth, as it reported 4% decline in revenues for January. However, the strong rise in sales of “go forward” apparel inventory is promising for the brand’s direct channel. It somewhat reassures the company that the channel can register robust growth in the future, once it sells-off its “non go forward” inventory. During L Brands’ earnings call, we will keep an eye out of updates on its plans for the direct channel.
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Notes:- L Brands Reports Record Fourth Quarter Sales, L Brands, Feb 5 2015 [↩]