L Brands To Report Strong Quarterly Results Yet Again

L Brands (NYSE:LB) is scheduled to report its Q1 fiscal 2015 earnings on May 20th (Fiscal quarter ends April). Note that it has already reported its sales growth figures in a recent press release. The company stated that its Q1 revenues increased by 5% to $2.512 billion from $2.391 billion in the year ago period, and comparable store sales also grew by 5%. After releasing the sales growth metrics, the parent company of Victoria’s Secret and Bath & Body Works raised its Q1 EPS guidance from $0.50-$0.55 to $0.58-$0.60, suggesting that it had another quarter of better-than-expected performance.

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 first quarter in particular, the company’s growth was driven by its continuous efforts to launch new products and frequently transition themes. In fact, the company had an extremely successful holiday season and saw extraordinary customer response during the January semi-annual sales, and yet there was no lull in traffic following the Q4 surge.

Our price estimate for L Brands is at $70, implying a discount of over 20% to the market price.
See our complete analysis for L Brands

During the February-April quarter, the health and personal care market grew by almost 5.4% and Bath & Body Works’ comparable store sales increased 4% on top of 2% growth in the year ago period and its direct revenues were up 15%. Overall sales of apparel and accessories increased 2.3% during the quarter, and Victoria’s Secret’s comparable store sales increased 5% on top of 2% growth in the same quarter last year. 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%. In the subsequent quarter, revenues and operating income jumped 40% and 76%, respectively. Martin Waters, president of international operations, has stated before 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 first 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” and it has now exited entirely from apparel. As the name suggests, the company is aggressively discounting its non-go-forward merchandise to clear off the inventory and make way for relevant 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 6% decline in revenues for the quarter. 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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