L Brands Might Continue With Its Weak Momentum In Q1 FY 2017, But Here’s Why It Has A Path For Turning Around
Even though L Brands is not looking great with its performance right now, we do have reasons to believe that all this is temporary and the company will soon make a turnaround. With its ongoing investments towards upgrading itself in terms of products and services and expanding its geographical presence, and with its streamlining effort to focus on its core business, L Brands seems to be performing poorly. However, we feel that these are short term pains in order to achieve long term growth.
L Brands, the parent company for Victoria’s Secret (VS) & Bath and Body Works (BBW), is slated to release its earnings on May 17th with the earnings call to be held on May 18th. The company has already revealed its Q1 fiscal 2017 revenues (fiscal year ends in January) during its monthly call. Its Q1 sales declined by 7% y-o-y to $2.44 billion while its comparable sales fell by 9%. The exit of the swim and apparel categories were some of the reasons for this decline. The company expects its Q1 FY 2017 earnings per share to be around $0.30 which includes a benefit of around $0.05 related to a lower tax rate.
Even Though Victoria’s Secret Is Transitioning And Hence Lagging Behind, Its Popularity Remains Intact
Victoria’s Secret is going through a rough patch because of its ongoing streamlining efforts to get rid of weak performing segments, including swimwear accessories and apparel, from its core business. Additionally, 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. The year 2016 had been a rough one for L Brands, since VS stores is the greatest revenue generating segment for the company contributing around half of the company’s revenues. In Q4 FY 2016, there was a drastic decline of footfall in the retail stores, as well. Even though brick-and-mortar retail stores have been struggling to attract traffic over the last few years, VS stores didn’t face the problem till recently. Due to the unique and indulgent experience offered in its stores, women had been found to frequent those even in the face of online shopping taking the world by storm. We can expect that as soon as the painful process of transitioning and the investments behind those efforts tend to cease, VS stores will once again be thronged by customers.
In fact, a recent research by Goldman Sachs and Conde Nast suggests that VS’s appeal is still intact among millennial shoppers. The brand is considered to be one of their top favorites alongside names such as Nike. The brand has an equally strong online presence as it does offline and that is one of the reasons why it can attract customers successfully no matter what kind of shopping they prefer.
L Brands’ Other Segments Are Also Not Far Behind With Their Growth Plans
It is important to note that not only VS stores but the BBW stores as well as its international operations are all making strides towards progress. BBW, unlike VS, has been growing strong so far. In FY 2016, BBW’s sales grew by 7% 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. Even then, the company might undertake some changes in this segment as the management feels that the personal care products sales is currently growing at a slower than expected rate.
L Brands made a lot of important changes in its international business in fiscal 2016. VS built a business in China in order to deal with problems like foreign exchange headwinds and lack of traction in travel retail sales. There are currently 627 L Brands stores spread across 74 countries internationally that generated sales to the tune of $1.1 billion in 2016.
Editor’s Note: We care deeply about your inputs, and want to ensure our content is increasingly more useful to you. Please let us know what/why you liked or disliked in this article, and importantly, alternative analyses you want to see. Drop us a line at content@trefis.com
Notes: