Weak Performance, Disappointing Performance Outlook, And Closing In

L Brands Inc. (NYSE:LB) offers a disappointing performance outlook based on the weakness of the biggest underwear brand Victoria "s Secret Vitoria" (VS), which led to a sharp drop of nearly 10% of the group's share price on Wednesday.

In the fourth quarter of 2018 fiscal year ending February 2, 2019, comparable sales (including online sales) of VS fell by 3% compared to the same period last year. It has not been able to grow in three consecutive holiday seasons, while sales in the same store also recorded a 7% decline.

The difference between the entity business and L Brands Inc. decided to close 53 VS North American stores within this year, more than three times the average number of stores in recent years (15 stores). In the performance commentary, the management said that based on the retrogression of VS, "compared with the historical level, we have substantially reduced the capital input of the business".

L Brands Inc. "big friend" - Jefferies analyst Randal Konik said on Thursday that he warned investors two years ago that VS and sub line PINK were worse than most peers.

Stuart Burgdoerfer, chief financial officer of the US group, admits at the earnings conference that there is no secret to VS at the moment.

No fashion Chinese network data show that in 2018, L Brands Inc. 3/4 operating profit from BBW, the brand's $1 billion 77 million 500 thousand operating profit accounted for 75% of the group's operating profit of $1 billion 437 million 200 thousand, while VS contributed only 512 million 400 thousand dollars of operating profit, down 45% compared with 2017, 2015, VS peak operating profit reached 1 billion 391 million U.S. dollars.

In 2018, the operating profit margin of underwear giant in the United States dropped to 6.9%, down 570 basis points.

However, many people believe that for the current L Brands Inc. with a market value of about $7 billion 200 million, it is only equivalent to the market value of a Bath Body Works (referred to as BBW), which is only 11 times P/E, and the current VS with profitability is equal to the total loss to investors.

Holding the above view, Barclays Barclays analyst Chethan Mallela said it had confidence in the management of the US company to restore VS, because the resumption of VS is the only task of the US company.

Therefore, the bank raised the L Brands Inc. rating from "holding the sidelines" to "increasing Holdings".

According to Barclays report, the L Brands Inc. lost a day earlier on Friday, which rose 5.20% to close at $27.50.

However, Randal Konik, who is familiar with the above assertion, retorted ahead of time on Thursday. He said that L Brands Inc. is relying on the growth of BBW, but the brand does not have the sustainability of growth. It will only make the investors who hope the brand can make up for VS more disappointed.

He believes that BBW's profit margin of 23.3% in 2018 will surely fall below 20% next year.

Jefferies after the performance of the underwear giant in the United States, it gave the industry the lowest target price of US $16, which means that the L Brands Inc. share price still has about 40% downside risk.

While the voice of women empowerment and diversity is growing louder and louder, trafficking sexy VS can not keep up with the emotional needs of consumers, and is being swept away by more and more emerging brands and products with more marketing gimmicks.

For example, Aerie, a girl underwear brand with no advertising plans, has helped the parent company American Eagle Outfitters Inc. (NYSE:AEO) earn more than $1 billion in the three quarter by virtue of its strong 32% store sales growth. Many times publicly criticized VS for looking at the latest financing of ThirdLove, which satisfies the male fantasy of nearly 55 million dollars.

Competition from traditional retailers is becoming more and more intense. The 8th largest retailer, Target Corp. (NYSE:TGT), Taghit group, announced this week that it will launch three self-contained underwear and home wear series to win VS customers at high cost.

Last year, VS sold more than 3 billion dollars in underwear. The market share of the underwear market in the United States is still as high as 2/3. Nomura Securities, Nomura Securities analyst SimeonSiegel, pointed out that despite the negative media coverage and people hate their marketing, VS is still one of the most expensive underwear brands in the world.

However, NPD Group data show that the millennial generation has occupied more than 1/3 of the underwear market consumption, and the group has contributed 1/3 of the purchasing power to sports underwear.

In the performance commentary, management pointed out that during the holiday season, the performance of VS was worse than expected. The comparable sales of underwear business can only be flat in the same period of the previous year. PINK also recorded a low single digit declines, while the cosmetic industry had a median digit growth rate.

In order to stimulate the passenger flow and clean up inventory, all businesses have increased the discount rate, and the profit margins of commodities have dropped significantly.

VS's operating profit dropped sharply from 34.1% to 300 million 700 thousand US dollars, while L Brands Inc.'s operating profit also declined by 19% to 799 million 400 thousand US dollars.

Management said, "underwear and PINK's new CEO are focusing on product categories" and believe that product improvement and the re emergence of swimsuit series after being chopped in 2016 can improve performance.

Underwear business new CEOJohn Mehas is the former president of American light luxury brand Tory Burch.

Analyst Randal Konik said that at present, VS is not faced with product problems that can be solved. Its business is being devoured by new and old rivals. The brand is now in a structural downlink channel. Although the share price of LBrands Inc. will fluctuate, the direction of the fundamentals is (downward) clear.

In the fourth quarter, L Brands Inc. recorded a net sales of $4 billion 852 million 300 thousand, basically unchanged from $4 billion 823 million 100 thousand in the same period of the previous year, but not as high as 4 billion 880 million dollars in the market expectations.

Thanks to the strong growth of Bath & Body Works12%, comparable sales increased by 3% annually.

Gross margin fell sharply by 175 basis points to 40.6%.

Net profit decreased by 18.7% to 540 million 100 thousand US dollars, and EPS declined from 2.33 US dollars to US $1.94.

The adjusted EPS is US $2.14, which is better than the US $2.07 expected by the market.

Net sales for the year totaled 13 billion 236 million 900 thousand US dollars, an increase of 4.9% compared with the 12 billion 632 million 400 thousand US $2017 in fiscal year 2017, net profit fell 34.9% to 643 million 900 thousand US dollars, and EPS decreased from 3.42 US dollars to 2.31 US dollars.

The Group expects that the adjusted EPS in the current fiscal year will further fall from $2.82 in fiscal year 2018 to 2.20-2.60 dollars, while the market is expected to be $2.71.

In the past year, the 753 stores in the international market contributed about $1 billion 500 million in retail sales to L Brands Inc., an annual growth of 16%. The direct business in the United Kingdom, Ireland and greater China accounted for 25% of international retail sales.

Management said last year that the UK business was challenged and recorded operating losses. At the same time, the group continued to invest in the Chinese market. The beauty and accessories stores (VSBA) and the e-commerce operated by Tmall platform performed well. There were 15 kinds of stores in the region. After market tests, the group decided to continue to locate smaller stores in the shopping mall. "We are optimistic about the further growth opportunities of this form."

International business revenue for the whole year was $605 million 300 thousand, up 20% over the same period, mainly driven by the Chinese market and the franchise business of VS, Bath & Body Works.

This year, the Group expects to add 50-75 overseas stores.

Last year, L Brands Inc. also sold underwear brand La Senza and ended Henri Bendel business.

Analysts estimate that the positive impact of divestiture on profitability will not come until the second half of 2019.