Victoria’s Secret Will Weigh Down On L Brands’ Stock In The Near Term, But Significant Upside Potential Remains

L Brands (NYSE: LB) engages in the retail of women’s intimate and other apparel, personal care, and beauty products. The company has seen soft sales growth over the last couple of quarters due to stiff competition and changing consumer preferences. Trefis captures trends in L Brands’ Revenues over recent years in an interactive dashboard along with our forecast for the current year. LB is expected to report a 1-2% decline in revenues for 2019 primarily due to decreasing sales for its PINK brand and loss of revenue from divestiture of La Senza and Henri Bendel. However, the company’s Bath & Body Works is likely to achieve low double-digit growth in the current fiscal year.

You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance and alter the assumptions to arrive at your own estimate for the company’s revenues. In addition, here is more Trefis Textiles, Apparel and Luxury Good Industry Data

A Quick Look At L Brands’ Revenues

LB reported total revenue of $13.3 billion in FY 2018. The key revenue sources are:

• Victoria’s Secret North America: $7.4 billion revenue in FY 2018 (55% of total revenue). The segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names, in US and Canada.
• Bath & Body Works North America: $4.7 billion revenue in FY 2018 (35% of total revenue). The segment sells body care, home fragrance products, soaps and sanitizers under the Bath & Body Works, White Barn, C.O. Bigelow, and other brand names.
• Victoria’s Secret and Bath & Body Works International: $0.6 billion revenue in FY 2018 (5% of total revenue). This segment includes company-owned and partner-operated stores located outside of the U.S. and Canada, as well as the online business in Greater China.
• Other Revenue: $0.6 billion revenue in FY 2018 (5% of total revenues). This includes sourcing and production functions, online and store apparel operated by partners, and other corporate functions. Two primary brands (La Senza and Henri Bendel) were divested in Q4 2018.

How Has L Brands’ Revenue Trended Historically? 

• L Brands has added close to $1.1 billion to total revenue since 2015 at an average annual rate of 2.9% completely driven by growth in its Bath & Body Works segment while its iconic Victoria’s Secret brand has struggled
• Bath & Body Works segment has accounted for more than 95% of total revenue growth since 2015
• Going forward, we expect L Brands’ revenues to decrease by 1.2% and remain just over $13 billion in FY 2019.

A Detailed Look at L Brands’ segment performance and revenue change over the years:

Victoria’s Secret North America Is L Brands’ Largest Operating Segment

• This segment consistently contributes the largest chunk of its revenues, with an average revenue share of 60% in the last 4 years.
• However, the segment’s share has declined from above 63% in 2015 to less than 56% in 2018 due to faster growth in the Bath & Body Works segment
• The segment’s revenue decreased $12 million in 2018 due to lower merchandise sales led by a decline in sales of the PINK and Victoria’s Secret Lingerie brands.
• We expect the segment sales to decline by 6% (y-o-y) in 2019 to $6.9 billion due to inferior merchandise performance in loungewear, declines in sport bras and the exit of the swim business. However, this growth is likely to be offset by strong performance in the Victoria’s Secret Beauty brand.

Bath & Body Works North America Has Achieved Steady Growth In The Last Few Years 

• Bath & Body Works segment has achieved robust growth in the last few years, with revenues increasing from $3.6 billion in 2015 to more than $4.6 billion in FY 2018
• This has been the most stable segment for the company, with growth in recent times being driven by growth in comparable store sales.
• This growth has been supported by strong sales in most categories including home fragrance, body care soaps and sanitizers due to newness, innovation, and fashion.
• We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 10% to $5.1 billion in FY 2019.
• The segment’s contribution to total revenues has significantly increased over the years, which is expected to continue in the foreseeable future.

Victoria’s Secret and Bath & Body Works International Is L Brands’ Fastest Growing Segment

• This segment has been L Brand’s fastest growing segment, adding more than $220 million to total revenues since 2015 at an average annual rate of 16%.
• The segment has continued to witness steady growth in the first half of 2019 with revenues increasing by 4% (y-o-y)
• We expect this trend to continue in 2019 as well, driven by opening of new company-owned Victoria’s Secret stores, direct channel growth in Greater China and higher sales from its partners and strong demand in China
• Moreover, the segment’s share to total revenues has increased from around 3.2% in 2015 to nearly 4.6% in 2018 and we expect this figure to increase further to nearly 5% in 2019.

Other Revenue Is Expected To Sharply Decline In 2019

• Segment revenue has been increasing through 2018, adding more than $115 million to total revenues since 2015 at an average annual rate of 7%
• However, we expect revenues to decline sharply in 2019 compared to 2018, driven by the adverse impact of divesting the La Senza and Henri Bendel brands, two large revenue contributors for the segment.

Based on our forecast, L Brands’ adjusted EPS for fiscal 2019 is likely to be around $2.41. Using this figure with our estimated P/E ratio of 12.2x, this works out to a price estimate of $29 for L Brands’ Stock, which is roughly 50% ahead of the current market price.

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