L Brands Is Developing A Habit Of Topping Estimates
May 2015 marked another month where L Brands‘ (NYSE:LB) steady sales growth trumped the market estimates. Earlier this month, the parent company of Victoria’s Secret and Bath & Body Works reported a 5% rise in net sales to $799 million, with 5% growth in comparable sales, that was way ahead of the consensus estimate of 2.7%. Backed by its proactive understanding of consumer behavior, L Brands operated with fewer markdowns compared to last year that drove its merchandise margins up. Inventory at the end of the month was down 4% (per square foot) indicating that fewer promotions did not lead to any unnecessary residual inventory. [1]
L Brands has been consistent in its performance in the U.S. and abroad for a long time now, thanks to its strong footing in the intimates and personal care markets. Time and again, the retailer has reported better-than-expected results which has pushed the stock up almost 45% over the last one year. A tremendous response to Victoria’s Secret‘s merchandise and marketing and strength in Bath & Body Works’ core categories have been the primary growth drivers for the company.
Our price estimate for L Brands is at $89, which is about 5% premium to the current market price.
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During the month of May, Victoria’s Secret comparable store sales increased 5% on top of 2% growth in the same month last year. Merchandise margins were up that indicated a clear improvement in average prices. Among the factors responsible for the brand’s success is its strategy of constantly changing themes and collections with different months and seasons. Victoria’s Secret started May with its improved Bombshell collection and PINK Racerback Bralette. Mid-way through the month, the focus shifted to the multi-way collection, which will last until mid-June, just before the start of the semi-annual sale. The brand has a vast array of merchandise and thus has options to try out something new every month.
Victoria’s Secret’s exit from apparel has hampered its direct channel growth significantly. However, the decline in revenues in May was at only 3%, which indicated an imminent recovery. Though mid-teen growth in revenues from core categories was more than offset by the absence of apparel, organic growth was very strong. This should be visible once the effect of apparel exit wears off. At Bath & Body Works, comparable sales were up 5% as new products launched in key categories – signature collection, home fragrance and soap & sanitizer – were very well received.
L Brands’ merchandising strategies have worked so far, making it one of the few retailers in the U.S. who have shown tremendous resilience against the edgy retail environment. We believe that it can continue this way in the near future, provided it sustains its strong customer connection with appealing marketing and products.
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Notes:- L Brands Reports May 2015 Sales, L Brands, Jun 4 2015 [↩]