L Brands in Jeopardy: Should Victoria's Secret Be Blamed?

L Brands, Inc. LB is losing its sheen, due to the dwindling performance of its Victoria’s Secret and PINK brands. Further, a high debt level, rising SG&A costs and dismal margins are acting as deterrents. The company has been struggling to make things work in its favor. Given these downsides, there isn’t any sign of revival in the near term.

In fact, this Zacks Rank #5 (Strong Sell) stock has not only declined but also significantly underperformed the industry in a year’s time. Shares of the company have lost 27.6% over that time compared with the industry’s decline of 14%.

A Brief Introspection

L Brands’ Victoria’s Secret brand appears to be losing appeal. The brand has been witnessing soft sales for quite some time now, owing to weak traffic. Notably, Victoria’s Secret sales dropped 5% to $2,532 million in the fourth quarter of fiscal 2018. Meanwhile, comparable sales fell 3%, while comparable store sales (comps) tumbled 7%.

Adding to the woes, L Brands is facing intense competition from American Eagle Outfitters’ AEO Aerie brand and Target’s TGT new Auden brand, which have been successful in luring customers away from L Brands.  Also, with more and more consumers preferring online shopping, a host of emerging e-commerce brands are gaining market share and might pose concerns for the Victoria’s Secret brand in the near term.

Of late, investors have pointed out that wrong merchandising actions and the company’s inability to keep up with its strong brand image have led to Victoria’s Secret’s failure. Some investors have also been suggesting L Brands to spilt Victoria’s Secret and Bath & Body Works brands for a turnaround. We note that the company’s Bath & Body Works brand has been showing strength. Sales in Bath & Body Works brand improved 9% during the final quarter of fiscal 2018, with 12% rise in comparable sales and 8% in comparable store sales.

Although management is optimistic about the revival of Victoria’s Secret brand and expects new products to woo customers back, experts think otherwise. They, in fact, believe that the brand has not been quick in responding to fast changing fashion trends.

L Brands focuses on restructuring the Victoria’s Secret brand, which was once known as the success formula for mass-market lingerie in the United States. In this regard, the company plans to shut down 53 Victoria’s Secret stores in fiscal 2019, which failed to generate desired results. Also, the company has relaunched the brand’s swimwear category within less than three years of its exit. With this latest move, the company aims at boosting seasonal sales and store traffic.

Additionally, L Brands concluded the sale of its luxury lingerie brand, La Senza to an affiliate of Regent LP on Jan 6, 2019. This move has been appreciated by investors, as the brand wasn’t living up to expectations. Further, in order to focus on its core product categories, L Brands announced plans to close operations at luxury fashion accessories store, Henri Bendel.

Apart from these, Victoria’s Secret’s PINK brand appears to be bleak. This category witnessed comparable sales growth in low-double digits during the fiscal fourth quarter and projected to decline further. In fact, L Brands’ gross margin has been contracting year over year for the past few quarters.

For fiscal 2019, its gross margin rate is likely to decrease year over year, mainly due to lower merchandise margins. Also, SG&A costs are expected to increase year over year, stemming from higher wage rate and inflation-related pressure. Further, L Brands’ balance sheet doesn’t look healthy, owing to a high debt level. As of Feb 2, 2019, the company had $5,739.4 million of long-term debt.

Wrapping Up

L Brands undertook measures to get back on track. These include lowering prices, strengthening core businesses, increasing focus on holiday season sales, and offering more relevant and innovative products to its customers. Despite such well-chalked efforts, the company failed to make a mark.

L Brands will not be relieved of its hurdles anytime soon, as the drab performance is likely to continue in the upcoming quarters. The company anticipates first-quarter fiscal 2019 comps to fall low-single digit. Total sales growth is expected to be roughly 1 point lower than comps. This can be accountable to loss of La Senza and Henri Bendel.

Earnings per share are envisioned to be breakeven in the first quarter compared with 17 cents in the year-ago period. For fiscal 2019, the company anticipates comps to rise low-single digits. Total sales growth is likely to lag comps by about 2 points.

All said, it is yet to be seen whether L Brands can make a successful comeback.

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