Key Takeaways From L Brands’ Q4 FY 2016 Earnings Results

February 23rd, 2017 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

L Brands, the parent company for Victoria’s Secret (VS) and Bath & Body Works (BBW), released its Q4 and full fiscal 2016 (fiscal year ends in January) results on February 22nd. The fourth quarter performance came in below the management’s expectations. Though PINK, the Victoria’s Secret brand aimed for teenagers, and Bath & Body Works displayed healthy growth, the rest of the divisions continued with their weak performance in line with the rest of calendar 2016. The traffic at L Brands’ brick-and-mortar stores witnessed a sharp decline in December and this was coupled by a decline in VS’s merchandise rate due to its current stock clearing process as part of its ongoing restructuring efforts.

For the full year, net sales declined by 3% to reach ~$12.6 billion and the comparable sales grew by 2% y-o-y. The shedding off of the swim and apparel sections from VS led to a 2 percentage point erosion in the comparable sales. The gross margin rate fell by 200 basis points to reach 40.8% in fiscal 2016. Adjusted EPS declined by 6% y-o-y to reach $3.74.

Net sales for Q4 declined by 2% y-o-y to reach ~$4.5 billion and the comparable store sales were flat. Also, the dampened merchandise margin rate led to a 230 basis point decline resulting in the gross margin rate to reach 43.3%.

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Investments Will Continue Dampening Near Term Growth

L Brands’ investments in both its subsidiaries continue with Barn remodels for Bath & Body Works and its investments in China. In order to improve the efficiency of its core business, L Brands excluded shoes, swimwear, accessories, and apparel from Victoria’s Secret’s business in 2016. These initiatives will continue slowing down the company’s performance in 2017, as well.

The Company’s Square Footage Might Increase In 2017

In 2017, the square footage for the Victoria’s Secret stores–that contributes to over 50% of the company’s revenues–will increase by 1% in North America due to 75 remodels and 3 net new store openings. The square footage of BBW in North America will grow by 4% due to 160 remodels and 25 new openings. The total square footage for the company might grow by 3%.

Let us take a look at the performance of its different businesses:

  • Victoria’s Secret

For the fiscal 2016, VS sales grew by 1% y-o-y to reach ~$7.8 billion and comparable sales were flat. The operating income for this segment declined by 260 basis points to reach $1.2 billion and this was mainly due to the dampening of the merchandise margin rate. The company had sold off almost all of the excess inventory from the exited categories. The exit of several categories will continue putting pressure on the performance in FY 2017 and the comparable sales are expected to be dampened by high-single digits in the first half of 2017.

The company excluded shoes, swimwear, accessories, and apparel from Victoria’s Secret’s core business and since these items offered annualized sales of ~$525 million in 2015, hence it had to sacrifice those gains last year. In the Beauty segment, it is trying to shift its focus from the fantasy beauty products to fine fragrance and high-end body care products. The VS business has been recently segregated into 3 segments: Victoria’s Secret Lingerie, PINK, and Victoria’s Secret Beauty, with each segment led by a different executive reporting to the CEO.

  • Bath & Body Works

BBW’s sales grew by 7% in FY 2016 and its comparable sales rose by 6% on top of the 7% of FY 2015. The operating income for this segment grew by 6% y-o-y to reach $907 million.

Like its VS business, the company might be thinking of making some changes in this segment as well because the personal care products sales seem to be growing at a slower rate than the management’s expectations. The innovativeness of the products might increase in the future like its new “Essentials” line focusing on essential-oil infused bodycare that was launched in this month.

  • International

The revenues from this segment increased by 10% y-o-y to reach $422.7 million in FY 2016 while the operating income declined by around 55% to reach $39.9 million due to the company’s ongoing investments in China and the foreign exchange headwinds. L Brands made a lot of important changes in its international business in fiscal 2016. In order to deal with a problems like foreign exchange headwinds and problems in travel retail sales, VS built a business in China. There are currently 627 L Brands stores spread across 74 countries internationally that generated sales to the tune of $1.1 billion in 2016. The international business is comprised of: 46 Victoria’s Secret and PINK full assortment stores, where the company added 10 new VS and 3 new PINK stores last year in countries such as Russia, Mexico, Singapore and China; VS Beauty and Accessories stores in local markets where 30 new stores were added in 2016; VS Beauty and Accessories counters in Travel Retail and military installations, where 19 net new stores were added in 2016; BBW stores where 34 new stores were launched last year.

Have more questions on L Brands? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for L Brands