L Brands Solid Growth Streak Continues Despite Its Exit From The Apparel Division
L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works, released its Q2 2015 earnings results on August 19th (quarter ended on August 1, 2015). The highlight of its earnings call (held on August 20th) was how Victoria’s Secret’s exit from the apparel category was impacting the company currently, and what could be the long-term impact. Both Victoria’s Secret and Bath & Body Works, are formidable players in their respective fields. However, the only weak link in the chain was the apparel category in Victoria’s Secret’s direct business. Though, by exiting the category, the company gave up almost $350 million in sales and experienced significant dampening of its gross margins, L Brands believes that its long-term growth prospects have been enhanced by this decision.
The only disappointment that the retailer faced in Q2 2015 was its unimpressive performance in the swimsuit division. Instead of building on the solid foundation of its Q1 2015 performance, the company tried introducing a new range of swimsuits that did not go over well with the buyers.
For the second quarter, the net sales for the retailer increased by 3% to $2.77 billion and the comparable store sales grew by 4%. Its gross margin expanded by 130 basis points to 40.3%, due to a growth in the merchandise margin rate. Even though occupancy and SG&A expenses deleveraged due to the investment in real estate and enhancement of its in-store experience, the company’s operating income grew by 7% to $402.9 million. [1] [2]
Despite foregoing sales from the apparel and makeup divisions (that amounted to $65 million in Q2 2014),Victoria’s Secret registered sales of $1.8 billion in Q2 2015, witnessing an improvement over its record performance last year. Comparable store sales increased by 3% and operating income grew by 2% to $298 million on a year-over-year basis.
Bath & Body Works continued demonstrating its solid performance with sales of $748 million, reflecting a 6% year-on-year growth. Its comparable store sales grew by 5% and each of its key businesses performed well.
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The Victoria’s Secret Direct Business Restructuring Bodes Well For The Company
Victoria’s Secret’s direct channel is currently focusing on strategies that will ensure more efficient usage of its resources, maximize its customer engagements, and improve profitability. Towards this end, it has restructured the core category and has given up on its peripheral businesses, such as makeup and apparel. Also, along with its catalog sales, it introduced buying product online and being able to return in a store the online sales, for over two years now. As a result, it is observing improved customer engagements and reduced user attrition. Mobile channels currently make up 25% of Victoria’s Secret’s direct business, and mobile sales witnessed 72% year-over-year growth in the second quarter. The company’s future plans include the upgradation of Victoria’s Secret catalog and investments in further enhancement of its mobile technology.
In Q2 2015, all the three categories of Victoria’s Secret’s bra business: sports bras, PINK bras, and VSL bras, demonstrated solid growth. The sports and PINK category grew by double digits, whereas the VSL bra category (coming from a greater base of around $1.3 billion) grew by high single digits. [1]
Victoria’s Secret’s operating margin target is usually 10% to 15% which had not been met in the second quarter due to its exit from the non-core apparel division. However, the management believes that after the initial hiccups of sacrificing a category, Victoria’s Secret will bounce back to its former glory in the long term. [1]
The Swimsuit Category Faced Disappointment
Victoria’s Secret experienced a huge setback in the swimsuit category. The management attributed the weakness to the launch of a brand-new fashion range which backfired for the company. The Q1 2015 results for swimsuits were impressive and instead of leveraging on the success, the company experimented with complex swimsuit designs for the second quarter. The customers weren’t too enthusiastic about the new swimsuit line. The swimsuit inventory was cleared in the second quarter through discount sales etc. and that dampened the gross margins to a significant extent. [1]
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Notes:- L Brands’ Q2 fiscal 2015 earnings transcript, August 20, 2015 [↩] [↩] [↩] [↩]
- L Brands Second Quarter Earnings Presentation, Aug 19, 2015 [↩]