June Didn’t Bloom In L Brands As Sales Growth Slightly Miss Projections

June 2015 marked a month where L Brands (NYSE:LB) joined other retailers in reporting lower-than-expected sales. Earlier this month, the parent company of Victoria’s Secret and Bath & Body Works reported a 3% rise in net sales to $1.21 billion, with 3% growth in comparable sales, slightly missing analysts’ predictions of a 3.1% increase. But 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 6% (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 past 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 $87, which is marginally higher than the current market price.

See our complete analysis for L Brands

During the month of June, Victoria’s Secret comparable store sales increased 1% on top of 3% growth in the same month last year. But merchandise margins were up that indicated a clear improvement in average selling prices. The company attributed at least some of the drop to the brand’s exit from selling makeup. In July, the lingerie chain plans to bounce back with focus on selling its Very Sexy Push-up Bralette and (Body By Victoria) collection. In the chain’s college-focused Pink brand, L Brands will focus on their Wear Everywhere Bralettes as the collegiate crowd begins to shop for the return to campus in the fall.

Victoria’s Secret’s exit from apparel has hampered its direct channel growth significantly. However, the decline in revenues in June was at only 4%, 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 6% 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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1. L Brands Reports June 2015 Sales, L Brands, July 9th, 2015 [↩]