Updated: Oct 24, 2020
"Lbrands (LB) has underperformed for a number of years but could there be hidden value in Victoria Secret, PINK or Bath & Body Works?"
By: Allan R Kirby
It may surprise some but Les Wexner purchased Victoria’s Secret in 1982 for just $1 million before buying a number of other specialty chains including Lane Bryant, Henri Bendel and Abercrombie & Fitch. At the time Les figured out how to create the perfect marriage between the mall and specialty retail stores to create high growth and value for both. This perfect marriage worked for a long time which in turn created incredible stock value for shareholders over the years. In fact by 2016, L Brands publicly traded under ticker (LB) the parent company of Victoria Secret was a multi billion dollar company bringing in billions in annual sales and a stock value of almost $100 per share.
Unfortunately the marriage did not last forever, since 2016 L Brands has sold or spun off many of its businesses leaving it with just three chains: Victoria’s Secret, Pink and Bath & Body Works. The company now operates 2,897 company-owned specialty stores in the United States, Canada, the United Kingdom and Greater China, and its brands are also sold in more than 700 franchised locations worldwide.
L brands has been languishing since its stock reached close to $100 back in 2016 and there are a number of reasons for its collapse. First, call it the Retailpocalypse or Mallpocalypse, it does not matter, the point is clear, online retailers took advantage of the shift in consumers looking for a more personalized convenient shopping experience. This spawned a new wave of online retailers such as Stitch Fix, Trunk Club, Le Tote, Wantable and DailyLook as well as other traditional apparel companies developing their own digital strategy.
All this was happening just as Lbrands’ Victoria Secret and PINK image was starting to feel outdated and not reflective of changing attitudes towards beauty. Add parent frustration with Victoria's Secret over highly sexualized ads and photos, as well as a continued focus on lace push up's instead of comfort and utility; it was clear Lbrands was not meeting consumer needs.
As a result of these missteps there has been a steady decline in Victoria’s Secret revenues. They have also continued to fail to find a way to resonate with today's shoppers who are now looking for comfort. Their PINK brand, which was once a bright spot for L'Brands has also struggled as they again missed out on more body-positive brands that were not providing hyper sexualized marketing and imaging.
The result has been poor stock performance, layoffs in corporate staff, multi year sales declines, store closings, deep discounting, poor quality issues and increasing competition. Clearly this is not a good and the long term outlook for L Brands is not encouraging. It did not help Lbrands image when Les Wexner was outed recently for his relationship with the deceased convicted sex offender Jeffrey Epstein. Epstien was a trustee of the Wexner Foundation.
L brands does have a bright spot, it's with its Bath & Body Works where sales have grown consistently with double-digit growth over multiple quarters. Unlike Victoria Secret and Pink, Bath & Body Works seems to be resonating with consumers, as a result it's now the strongest segment of the Company.
Lbrands is looking to get rid of Victoria's Secret, in fact there was an offer from buyout firm Sycamore Partners to take a majority stake in Victoria's Secret but walked away from the $525 million deal. They backed out after the lingerie brand shut down stores and furloughed staff due to the coronavirus outbreak. But this appears to only be a minor setback. On May 4, 2020, the company outlined its go-forward strategy to drive long-term shareholder value. As part of this strategy, the company remains committed to establishing Bath & Body Works as a separate public company and is taking the necessary steps to prepare the Victoria’s Secret and PINK businesses to operate as a separate, standalone company.
Last Quarterly Results
The company reported an ugly quarter with net sales of $1.654 billion for the first quarter ended May 2, 2020, compared to sales of $2.629 billion for the quarter ended May 4, 2019. Almost all of the company’s stores had been closed since March 17 due to the COVID-19 pandemic.
The bright spot was Bath & Body Works where their first quarter sales in the United States and Canada were $712.7 million compared to $870.7 million last year. Sales at the Bath & Body Works direct business, which remained open throughout the quarter, increased by 85 percent to $288.9 million compared to $156.4 million last year. Bath & Body Works first quarter store comparable sales increased 20 percent during the period in which stores were open.
Looking at Q1 results it clearly appears self care is in high demand and will continue to be strong, L brands' Bath & Body Works fits this trend perfectly going forward plus their direct business, saw sales increase by 85% in Q1. This is very encouraging.
“Bath & Body Works, which was responsible for the vast majority of L Brands’ 2019 operating income. It will become a stand-alone public company at some point. ”
Is LB a good stock to buy?
When looking at stocks, especially ones that appear to be inexpensive, you still need to understand why. Sometimes the market gets it wrong and the stock is undervalued but there are times when the market gets it right. This is the case with LB, there is just too much uncertainty. Victoria Secret has an uphill battle and spinning it off along with PINK makes sense with all of the issues it currently faces. L brands will survive the current pandemic but it will likely end up being just Bath & Body Works.
This is not a screaming buy , I just cannot see value in LB even at current levels until there is more clarity with COVID-19, the economy and how the company proceeds to spining off its three remaining brands. Potential investors should take the time and do their research but also tread carefully before adding LB to their portfolio.
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Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about the stock mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.