When L Brands Inc. posted December sales results earlier this month, the parent of Victoria’s Secret said total sales for the five weeks ended Jan. 2 rose 9 percent.
The results reflect a strong performer in the specialty retail segment, analysts said, that amid a challenging consumer spending environment, will emerge as a standout again this year. Moreover, L Brands’ strong balance sheet and market position makes it a “best-in-class” retailer, according to Fitch Ratings.
On the sales call, the company said L Brands’ December same-store sales were up 8 percent, while the merchandise margin rate was flat year-over-year. At Victoria’s Secret, same-store sales for December increased 8 percent, which is over a 3 percent gain in the same month in the prior year. Comps for Victoria’s Secret Direct gained 14 percent.
Amie Preston, chief investor relations officer, said the 8 percent comps performance for Victoria’s Secret was “driven by holiday sales growth and continued strength in core, lingerie and Pink, partially offset by a decline in beauty, as we are in the process of repositioning this category. Sales also benefited from the planned earlier start date of our semiannual sale this year.”
Scott Tuhy, analyst at Moody’s Investors Service, wasn’t surprised by the results. “The company outperformed the sector during the holiday season, which is favorable, but this is a continuation of strength that has been consistent for years across both Victoria’s Secret and Bath & Body Works,” he said.
After the sales call, Paul Alexander, equity analyst at BB&T Capital Markets, reiterated a “buy” rating on the stock, and pegged it with a $114 price target. He also raised the fourth-quarter earnings per share estimate by 5 cents to $2.02. Alexander said L Brands’ long-term “potential remains undervalued.” Shares of the retailer have recently been trading around $95. The stock’s 52-week high is $101.11, and the low is $75.11.
Three years ago, L Brands was a $40 stock that investors viewed as holding the right value. But the retailer doubled-down on merchandising efforts, marketing and inventory control and has emerged as a retailer with a “dominant market position,” said Fitch Ratings in its High-Yield Retail Checkout Report released earlier this week.
“L Brands is the dominant player in intimate apparel and personal-care and beauty products through its two main brands — Victoria’s Secret and Bath & Body Works,” said Fitch analyst Grace Barnett. “The company has demonstrated relatively strong pricing power, driven by its unique merchandise and loyal customers. Fashion risk is a factor, but given solid performance over the past four years, merchandise has been on-trend and well received.”
As a result, Barnett said the retailer has posted strong top-line sales growth directly driven by robust and consistent comps. And it has executed extremely well, the analyst said, adding her firm “expects sustainable comps growth in the 2 to 3 percent range, with [pretax] margins at approximately 22 percent over the next three years.”
Barnett noted that 85 percent of the company’s products are sold through physical retail stores with the rest via online and catalogues. “The growth of Pink concept stores in the U.S. and international expansion could potentially drive top-line growth in the midsingle-digit range,” Barnett added. “The business relies heavily on the fourth quarter, when it generates about 50 percent of [earnings before interest, taxes, depreciation and amortization] and essentially all its [free cash flow].”
One area of focus for the retailer has been improving the in-store experience, which includes better trained sales associates. In the fall, an industry source said L Brands had acquired 40,000 iPads to deploy to store employees at its Victoria’s Secret brand. The iPads would be used for training employees. The program involved short, training modules that sales associates could view between helping shoppers. The company did not return calls for comment on the program.
From an investor’s perspective, Barnett said the retailer has a “friendly posture” as it has returned more than $8 billion to shareholders since 2010. And it has strong liquidity. Regarding equity analysts, the consensus on L Brands is bullish. According to S&P Capital IQ, analysts’ consensus rating on the company has it as an “outperform” stock.
But the retail landscape remains difficult. Shifting consumer behavior toward experiences rather than buying “things” has challenged the industry. And recent deflation at retail has added another layer of angst to the market.
L Brands is scheduled to report fourth-quarter and 2015 year-end results on Feb. 23.