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Why Is L Brands (LB) Down 2.9% Since Last Earnings Report?

It has been about a month since the last earnings report for L Brands (LB). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is L Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

L Brands Q1 Earnings Meet Estimates, Sales Increase Y/Y

L Brands, Inc. posted first-quarter fiscal 2021 results, with the top- and the bottom line meeting the Zacks Consensus Estimate. Impressively, both sales and earnings improved on a year-on-year basis. Additionally, management provided an upbeat earnings view for the second quarter.

The company’s first-quarter performance gained from continued strength in the Bath & Body Works and Victoria’s Secret segments. Momentum in both businesses was driven by customer’s positive response to assortments, which in turn, led to reduced promotional activity and higher merchandising margin rates. Also, relaxation in pandemic-induced restrictions and government stimulus payments favorably impacted the quarter.

Quarterly Discussion

L Brands delivered adjusted earnings of $1.25 per share, in line with the Zacks Consensus Estimate. The quarterly earnings increased significantly from adjusted loss of 99 cents reported in the year-ago quarter. The year-over-year upside can be attributed to better-than-expected sales and margin rates at both Bath & Body Works and Victoria’s Secret.

Net sales of $3,024 million were in line with the consensus mark and improved 82.8% on a year-over-year basis. The metric gained from relaxed restrictions associated with the pandemic as well as government stimulus payments. Management estimates that the government stimulus is likely to have positively impacted sales by nearly $50 million at Bath & Body Works and $75 million at Victoria’s Secret.

The company’s sales in the year-ago quarter (first-quarter fiscal 2020) were adversely impacted by pandemic-led store closures for roughly half the quarter. The top line increased 15% from first-quarter fiscal 2019 level.

Comparable sales (stores and direct business) rose 21% during the reported quarter compared with an increase of 4% in the year-ago quarter. Comparable sales (stores only) rose 7% compared against a decline of 5% in the prior-year quarter.

Gross profit amounted to $1,413.8 million during the quarter, up from $288.6 million in the year-ago period. Gross margin expanded 2,350 basis points to 46.8%. The upside was driven by improvement in the merchandise margin rate and buying and occupancy expense leverage. Moreover, improved merchandising and selling strategies along with disciplined inventory management at Victoria’s Secret aided the company to pull back on its promotional activity. Such strategies drove growth in average unit retail and merchandise margin rates. The merchandise margin rate grew roughly 800 basis points driven by lower promotional activity.

Adjusted operating income amounted to $572.1 million, up considerably from adjusted operating loss of $220.9 million in the year-ago quarter.

Segment Discussion

Bath & Body Works’ total sales increased 93.2% year over year to $ $1,469.5 million. Comparable sales (stores and direct business) surged 16%. Comparable store sales increased 12%. In the direct channel, sales increased 20.9% to $349.2 million. The company witnessed balanced growth across all merchandising categories, namely Home Fragrance, Body Care, Soaps and Sanitizers. Sales at Bath & Body Works International advanced 45.7% to $69.8 million. In U.S. and Canada stores, sales surged 148% year over year to $1,050 million.

Bath & Body Works segment has continued with its stellar performance, however, management still remains cautious as the company laps extraordinary results of last year in the second and third quarters. In fiscal 2020 Bath & Body Works operating income grew by $165 million or 90% in the second quarter, by $285 million or 137%, in the third quarter and by $250 million or 38% in the fourth quarter. Also, the company expects continued pressure from inflation and macroeconomic costing increases as well as potential supply chain disruptions. Again, pandemic-related risk of closure or restrictions in operating outside the United States cannot be ignored. Nonetheless, Bath & Body Works is resuming its investment in the remodeling and opening of new stores. Management’s expectation of operating margin in the low to mid-twenties is appropriate for the Bath & Body Works segment.

Total sales in Victoria’s Secret surged 73.9% to $1,554.2 million. Comparable sales (stores and direct business) rallied 25%. Comparable store sales witnessed a rise of 3%, while sales in the direct business surged 69% to $520.9 million. The company witnessed strength across its Lingerie, PINK and Beauty businesses. Sales at Victoria’s Secret International increased 39.4% to $100.4 million. In U.S. and Canada stores, sales increased 81.5% year over year to $932.9 million.

The performance across Victoria’s Secret segment is likely to improve driven by the brand repositioning work, improved assortments, more disciplined inventory management, profit improvement plan and lapping 2020 pandemic related store closures. Again, Victoria’s Secret is investing in a store “refresh” program. Management anticipates mid-teens operating margin in the near-term for the segment.

Store Update

As of May 1, 2021, company-operated stores were 2,681, comprising 1,752 Bath & Body Works and 929 total Victoria's Secret stores. Total Victoria's Secret stores include 698 Victoria’s Secret, 143 PINK, 24 Victoria’s Secret Canada, two PINK Canada, 36 Victoria’s Secret Beauty and Accessories and 26 Victoria’s Secret China.

Total partner-operated stores were 757, including 281 Bath & Body Works, 104 Victoria’s Secret, 17 PINK and 196 Victoria’s Secret Beauty & Accessories. Further, partner-operated stores comprised 141 and 18 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

With respect to Bath & Body Works segment, L Brands completed 31 North American real estate projects during the quarter under review – 21 new off-mall stores and 10 remodels. In fiscal 2021, L Brands is targeting roughly 50 new outlets, almost entirely off-mall North American stores. It plans to close 20-40 stores, primarily mall-based locations. We note that the company opened 14 new international stores and closed three in the quarter. The company expects its partners to open another 60-70 new international locations.

Other Financial Details

L Brands ended the quarter with cash and cash equivalents of $2,807.3 million and long-term debt of $5,344.3 million. Total inventories declined 6% year over year to $1,396.9 million. Shareholders’ deficit was $532.9 million. Management incurred capital expenditures of $64.5 million in the quarter under review.

For fiscal 2021, the company is estimating capital expenditures in the range $400-$450 million, up $50 million from the prior projection, owing to the new Bath & Body Works direct channel fulfillment center. Roughly 60% of the capex relates to Bath & Body Works, while the remaining relates to Victoria’s Secret.

During the quarter, the company bought back 2.6 million shares for $165.1 million. The company has $334.9 million remaining under its $500 million share repurchase program.

Outlook & Other Updates

The company expects second-quarter fiscal 2021 earnings in between 80 cents and $1.00 per share. This excludes one-time costs related to the spin-off of Victoria’s Secret. During second-quarter fiscal 2020, adjusted earnings amounted to 25 cents per share. Again, management anticipates second-quarter sales to increase in the band of 10-15% compared with fiscal 2019 second-quarter sales of $2.9 billion. Gross margin rate is estimated to be in the low 40s, up significantly to 2020 and 2019, thanks to the merchandise margin rate and buying and occupancy expense leverage. L Brands expects second-quarter SG&A rate to be about flat to 2019’s 27.8%.

For the third and fourth quarters of fiscal 2021, L Brands envisions inflationary pressures in the supply chain and the transportation network. The company also expects potential disruptions in the supply chain, which could result in higher costs as well as delay in inventories.

We note that L Brands’ board has approved plans to spin-off Victoria’s Secret business into a standalone company. The move came in after a prolonged period of strategic analysis of the Victoria’s Secret business, including its sale. Moreover, the company believes that a spin-off is likely to boost shareholders’ value. The spin-off will result in two independent public companies — Bath & Body Works and Victoria’s Secret. The transaction will be carried out through a tax-free spin-off of Victoria’s Secret to L Brands’ shareholders. The transaction is expected to be completed in August 2021, subject to customary closing conditions.

Management expects the spin-off to help each company maximize financial flexibility and boost strategic focus. This will enable the companies to thrive better in an evolving retail landscape. Management highlighted that the company has made significant progress in achieving a turnaround in the Victoria’s Secret business. Backed by the prudent growth efforts, Victoria’s Secret is now well positioned to thrive as a standalone public company and continue with its global growth momentum. Over the coming months, the company will evaluate appropriate capital structures for each Bath & Body Works and Victoria’s Secret business.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 25.44% due to these changes.

VGM Scores

Currently, L Brands has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise L Brands has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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