Why Bath & Body Works Has Been More Important Than Victoria’s Secret For L Brands Over Recent Years

November 13th, 2019 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

L Brands (NYSE: LB) engages in the retail of women’s intimate and other apparel, personal care, and beauty products. The company’s financial performance over several quarters has been weak primarily due to sub-par performance by its iconic Victoria’s Secrets brand. While the Victoria’s Secret brand has struggled, L Brands’ Bath & Body Works division has gained prominence to become the most important growth driver for the company. Trefis highlights the importance of its Bath & Body Works division for L Brands in an interactive dashboard. You can modify any of our key drivers to gauge the impact changes would have on L Brands’ valuation.

Why Is Bath & Body Works So Important To L Brands?

#1 Bath & Body Contributes More Than One-Third Of L Brands’ Revenues

  • 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 higher comparable store sales due to an uptick in revenues across most categories including home fragrance, body care soaps and sanitizers.
  • As a result, Bath & Body Works’ contribution to L Brands’ revenues has increased from less than 30% in 2015 to 35% in 2018.
  • We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 10% to $5.1 billion in FY 2019
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#2 Bath & Body Works’ Division Has Outpaced Growth In L Brands’ Total Revenues In Each Of The Last 3 Years

  • L Brands has added $1.08 billion to total revenue since 2015 at an average annual rate of 3%.
  • B&B Works alone added $1.04 billion to L Brands’ total revenue at an average annual rate of 9%.
  • Nearly all of L Brands’ incremental revenue growth has come through B&B since 2015 – more than making up for the company’s declining Victoria’s Secret segment which has lost nearly $300 million in total revenues since 2015

 

#3 Bath & Body Works Has Reported Strong Growth Compared To Key Brands For L Brands’ Prominent Competitors

 

#4 Bath & Body Works Has Been Operating At A Higher Margin Too

  • Bath & Body Works’ three-year average operating margin was 13.2%, almost 80% more than that of L Brand’s total operating margin of 7.2%
  • Although, the company’s operating margin in FY’2018 was impacted due to a one-time loss on the sale of La Senza,  and impairment charges related to Victoria’s Secret store closures, B&B Works has continued to operate at a higher margin than the company historically and is expected to continue to do so.

 

#5 Bath & Body Works Has Achieved Strong Comparable Sales Growth Over The Last Few Years

  • Bath & Body Works has seen robust growth in the last few years, with the brand achieving comparable sales growth in excess of 5% over 2016-17 and 11% in 2018
  • On the flip side, L Brands’ comparable sales growth declined by 3% in 2017 before recovering to achieve a growth of 3% in 2018. B&B has comfortably outpaced the company’s growth led by strong sales across most categories

 

Conclusion

  • B&B is L Brands’ fastest-growing division – accounting for most of the company’s growth.
  • With growth fundamentals remaining strong for the brand, we expect B&B to be pivotal to the company’s long-term revenue growth, profitability improvement and enhanced shareholder returns.
  • Moreover, the brand holds strong growth potential as the brand’s body care products have significant growth opportunity in many key markets
  • Finally, L Brands’ largest segment, Victoria’s Secrets, has struggled over the last couple of years – increasing the importance of the B&B Works segment to L Brands’ long-term growth.

Starting with our forecast for L Brands’ revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2019 is to be around $2.59. Using this figure with our estimated forward P/E ratio of 9x, this works out to a price estimate of $23 for L Brands’ stock

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