L Brands Continues to Decline on Weakness in Victoria's Secret

Shares of L Brands, Inc. LB have declined and underperformed the industry in the past six months. Notably, the Zacks Rank #4 (Sell) stock has dipped 29.5% compared with the industry’s decline of 7.9%.

L Brands is struggling to make a comeback in the wake of rising competition from online rivals like ThirdLove, Adore Me, Lively, and True & Co. Further, the company has often been accused of failing to bring in trendy merchandise as per industry experts.

Clearly, continued sluggishness in Victoria’s Secret has been taking a toll on its profitability. Revenues in the unit decreased almost 8% year over year in the third quarter of fiscal 2019, with lower traffic in both stores and e-commerce. Moreover, comparable sales declined 7% in the said period and comparable-store sales tumbled 8%, owing to lower traffic and average unit retails.

Comps were down in low-double digits in the lingerie business. The metric declined in the mid-single-digit range at the PINK product line that targets youngsters. Segmental gross margin rate fell significantly due to a decline in the merchandise margin rate, and buying and occupancy expense deleverage.

Nevertheless, the company is leaving no stone unturned to revive its Victoria’s Secret brand. Product launches, increased focus on omnichannel capabilities and improved marketing strategies are some of the notable moves in this direction. Per sources, the company is also making investments in the Victoria’s Secret sleep and lounge category to stabilize the top line.

These apart, it discontinued the annual fashion show and signed up a transgender model to reinvent its image. Further, L Brands relaunched Victoria’s Secret swimwear category in less than three years of its exit. Moreover, the company seeks to expand in the adjacent categories to drive growth.

Is There Any Bright Spot?

Amid such turmoils, L Brands has been benefitting from strength in Bath & Body Works, which formed roughly 40% of the company’s third-quarter net sales. In the quarter, Bath & Body Works delivered a solid show and surpassed expectations. Total sales grew 11% to $1,064.1 million, with 9% rise in comparable sales and a 5% improvement in comparable-store sales. Management stated that the segment benefited from favorable customer response for merchandise assortment. Bath & Body Works’ direct channel remained sturdy, with sales growth of 30%.

Moving ahead, management aims to continue investing in the White Barn concept and has chalked out about 200 White Barn projects. Moreover, we expect strength in Bath & Body Works to provide some cushion to the stock.

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