In its 50 years of existence, L Brands Inc. (LB) has created a portfolio of strongly-recognized brands, whose popularity has carved its long-term success in the retail industry. The firm´s flagship is the internationally- known Victoria´s Secret trademark, which represents 63% of total LB´s revenues. Its exclusive and fashion- inspired collections of premium-priced lingerie have set it in a leading position, with almost 30% of the market share. And its brand cachet keeps it well aside from its competitors, even in times of economic constriction. In fact, the brand has generated one of the best sales per square foot in the retailing space, reporting more than $800 in sales per square foot in 2012.
The company also offers other prestigious women´s apparel, beauty and personal care products and accessories through VS and its other brands Pink (Victoria's Secret), La Senza, Bath & Body Works and Henri Bendel. It operates a total of 2,933 specialty stores in the United States (1,063 Victoria´s Secret , 1,568 Bath & Body Works and 29 Henri Bendel locations) as well as 268 stores in Canada and five Victoria´s Secret locations in the UK.
A Solid Performer in a Challenging Scenario
A recessive economic environment diminished customers´ discretionary spending, making buyers turn to price-oriented purchases in detriment of premium products. In this context, L Brands latest sales reports showcased an annual increase in comparable same store sales of 2% for 2013 and a raise of 9% in January. This better-than-expected result improved earnings guidance and management now expects its fourth-quarter earnings per share to be slightly above its previous guidance of $1.60. Victoria´s Secret continues to be the main contributor for the company, with a 10% increase in January´s comps, followed by Bath& Body Works with 6% and 4% for La Senza.
Efficient Management and Narrow Economic Moat
Highly popular in the lingerie retail industry, LB´s expansion into new categories allowed it to beat less competitive labels like Express Inc. (EXPR), which offers lower prices. However, brand recognition prevailed and L Brands gained more market share for its higher-margin products. The strength of its performance is the result of a strategy that covers multiple fronts. At a domestic level, LB has focused strongly on inventory and expenses management and speed-to-market initiatives. The innovation in its exclusive merchandise also remains a top priority, since it is the reason for its brand strength, and thus an important part of its economic moat.
Management is also driving a careful expansion overseas, and locations outside the U.S. are expected to grow by18% to around 880 units in 2013. Furthermore, the firm is seeking to expand to new categories and is also repositioning its La Senza brand, by targeting younger consumers and offering fashion items at more affordable prices.
A Secret to be Shared
The fact that L Brands sustains consistent growth with higher-priced products in times of economic headwinds, is nothing but the proof that LB has built a narrow moat and is making the best of it. Furthermore, the company is enhancing its shareholders´ value by actively managing its cash flow through the repurchasing of shares and dividend payments. Recently, it raised its quarterly dividend by 20% to $0.30 from $0.25. L Brands stocks trade at 19.50 its trailing earnings compared to an industry average of 18.10. Its higher dividend payout of 0.80 compared to its peer´s average of 0.32 makes up for the price. And its return on capital showcases a strong 87.20 compared to 19.10 of the industry median. Investment guru Ray Dalio (Trades, Portfolio) recently increased his holdings by 27.27% following my bullish feeling about LB´s growth in the long term.
Disclosure: Vanina Egea holds no position in any stocks mentioned.