L Brands: A Sexy Stock, Or Smelly One?

Quick Summary

L Brands (LB) is a specialty retailer focused on women. The company has two primary brands. Victoria's Secret (and PINK) is a women's intimate apparel chain, with 1,180 locations in the U.S., Canada, U.K., and China. Victoria's Secret generates 53% of the company's sales. Bath & Body Works (BBW) sells personal care, home fragrance (candles, etc), and soaps at 1,735 U.S. and Canada locations,. BBW is 40% of the total sales. The remainder of sales are from franchised and licensed locations of both brands (440 Victoria's Secret and 275 BBW) internationally. Both concepts generate about 80% of their sales from mall-based locations, with 20% coming from e-commerce sales. L Brands is a domestic firm, with only about 5% of revenues originating from outside of North America. The company in 2020 entered into negotiations to sell a majority share of Victoria's Secret to private equity firm Sycamore, but the transaction fell through due to COVID-19.

Does The Company Have Recurring And/Or Rising Revenues?

NO. Sales trends have been deteriorating at L Brands for some time, with 3-year average annual sales growth anemic at under 1%. Victoria's Secret, in particular, has been weak, with 17 straight quarters of operating margin contraction, and same-store sales declines averaging 4% over the past 5 years. The growth outlook isn't much better. The store base is over-saturated, with L Brands reporting net store count declines for years. Given the mall-based nature of its concepts and the secular decline in mall traffic in the U.S., this trend is unlikely to reverse. Both Victoria's and BBW sell discretionary products, where sales are transactional and have no recurring attributes. Tepid recent growth, few attractive growth prospects, and a non-recurring sales nature make the revenue model unattractive.

Does The Company Have Durable Competitive Advantages?

NO. Victoria's Secret was once seen as a strong brand for intimates, but a recent track record of poor results and increased competition has eroded that advantage to the point where we no longer feel the brand can protect profit margins. Victoria's Secret has seen its market share fall from 34% to 26% in under 5 years. In fact, the performance of Victoria's has declined to such a point where L Brands is actively trying to sell the concept. Bath & Body Works has done better (5% same-store sales growth and over 20% margins), but competes in a stronger category with lower barriers to entry. Neither category is privy to "automatic" purchasing, and neither brand affords L Brands the ability to price materially higher than competitors while still maintaining sales volumes. Without that, both concepts face direct competition in highly competitive product categories with low barriers to entry. We see no moat here.

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Disclaimer: The content is provided by Alexander Online Properties LLC (AOP LLC) for informational purposes only. The material should not be considered as investment advice or used as the basis ...

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