Due To Internal Restructurings And Currency Headwinds, L Brands Growth Is Expected To Continue Albeit At A Slower Pace

L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, is slated to release its Q2 2015 earnings results on August 19th. The company had been displaying strong performance over a long period of time due to its robust footing in the intimate and personal care markets. The main growth drivers for the company have been the popularity of its Victoria’s Secret‘s merchandise and marketing and strength in Bath & Body Works’ core categories. For Q1 2015, L Brands’ net sales increased 5% year over year to $2.51 billion, with a similar increase in comparable sales. On the profitability side, L Brands gross margins expanded 90 basis points as the company successfully scaled back on promotional activities. ^[1] The company had been exceeding expectations over several quarters and has experienced an over 70% rise in its stock price over the last one year. The retailer has been a favorite brand in the U.S. and despite currency headwinds, its international appeal has not eroded.

However, despite the growth streaks, the company has given unimpressive growth guidance. For Q2 2015, L Brands expects growth to the tune of low single digits for Victoria’s Secret and Bath & Body Works brands. Though the brands remain the best choice among consumers in their respective segments, the slow growth forecast can be largely attributed to the strengthening dollar against weak international currencies, the company’s exit from the non-core apparel segment, and its heavy discounting of non-go-forward categories.

We will revise our $87  price estimate for L Brands, post the earnings results.

See our complete analysis for L Brands

 Some Of The Factors Positively Impacting Growth So Far

• L Brand’s strategy of introducing new themes and collections according to different months and seasons under the Victoria’s Secret brand has been a success so far. For example, Victoria’s Secret began May 2015, with its improved Bombshell collection and PINK Racerback Bralette and then in mid-May, its focus shifted to the multi-way collection, which lasted until mid-June, just before the start of the semi-annual sale.
• The Victoria’s Secret brand’s wide collection of merchandise provides it with the option of new launches every month.
• The company’s frequent launch of new products in key categories such as home fragrance, and soap & sanitizer for Bath & Body Works, propels growth in the division.

2015 Expansion Plans

By the end of 2015, L Brands wishes to expand Victoria’s Secret‘s square footage by 4% with the addition of 25 new stores and the expansion of existing stores. The square footage increase for Bath & Body Works is expected to rise by 3% by the end of this year, with the addition of 24 new stores and 83 remodeled stores.

Victoria’s Secret’s Growth Expected To Improve With The Exit From The Apparel Division

Victoria’s Secret’s direct-to-consumer business had been faltering for 2013 and 2014 because of the underperformance of its apparel division and absence of shipping and handling revenues. The apparel industry slowed down during these periods due to changes in consumer spending patterns and Victoria’s Secret’s apparel sales also suffered, even though its intimate product sales were growing steadily as usual. As a remedial measure, the company started categorizing its products into “go forward” and “non go forward” categories and started clearance sales for the latter category. This helped the growth of the direct-to-consumer business for which the revenues fell by 4.8% in 2013 and then shrunk further by 0.6% to $1.5 billion in 2014.

In the last few months, Victoria’s Secret’s exit from apparel has dampened its direct channel growth. However, the decline in revenues have been restricted to low single digits and we expect the recovery process to start soon. The organic growth for the company has been very strong and it should be better visible once the effect of the apparel exit wears off.

Bath & Body Works’ Steady Growth Expected To Continue On The Back Of U.S. Personal Care Industry Growth

Bath & Body Works‘ strong growth can be attributed to its core categories: the signature collection, soap & sanitizer products, and home fragrance. Additionally, the U.S. personal care industry itself has recently performed very well. Last year, the health and personal care market grew 6% and it increased by a similar amount during the first three months of 2015. This indicates further growth for a strong player such as Bath & Body Works.

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1. L Brands’ Q1 fiscal 2015 earnings transcript, May 20, 2015 [↩]