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Here's Why L Brands Looks Like a Solid Investment Proposition

June 13, 2014 | About:
rusticnomad

Rustic Nomad

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L Brands (LB), one of the largest retailers of women’s apparel, had a depressing end to 2013. The situation became worse when L Brands had a soft start to the new fiscal year. The company's revenue declined and this is a matter of worry for investors. However, despite a challenging environment, L Brands met analysts’ estimates on earnings, but the company failed to impress with revenue numbers and disappointing consensus estimates.

However, L Brands' management is making some aggressive moves to improve the fundamentals of the business.

Positive Moves

Victoria’s Secret is L Brands’ most famous brand. It is well known for providing high quality women apparel. Due to challenges existing in the market, Victoria’s Secret posted mixed results. Although the company started the quarter on the front foot, it faced a negative impact on its margins due to promotional activities. However, management says that it is working on improving Victoria’s market share and is focusing on long-term gains, so the company wouldn’t mind losses in the short term.

Many new products are expected to come out of Victoria’s Secret’s pipeline. The company looks geared up to benefit from the upcoming spring season. However, it remains conservative. According to Victoria’s Secret's CEO, “We will be conservative in our expectations for the season, and we will leverage speed to read and react to performance in terms of our investments in inventory and expenses.”

Management wants to maintain strong sales, along with maintaining good margins. Under such a strategy, Victoria’s Secret is making investments in real estate and other customer-focused initiatives.

International growth

Victoria’s Secret is seeing strong growth on the international front. With such a robust performance by the brand, L Brands wants to stretch its foot print further. For example, in Canada, the company is operating with its La Senza brand and has 34 stores running. The company is further planning to open seven more stores in Canada. Also, in the UK, L Brands’ PINK brand is also moving forward at a steady pace. The four stores that L Brands had opened last year continue to perform well, and it plans to open six more stores this year.

Apart from flourishing in the women apparel business, L Brands’ beauty and accessories business, where it operates under the brand Bath & Body Works, is also doing well, and the company has various expansion plans for it as well. In Canada, L Brands is already running 79 stores, and it further plans to add another 10 stores to its total retail stores in Canada. L Brands is also focusing on expanding its footprint in regions such as the Middle East, Southeast Asia and Latin America, as it has plans to open 20 to 30 franchise stores this year in these regions.

Overall, L Brands is doing well internationally, with its apparel and accessory brands seeing good sales.

Competition

On the other hand, Hanesbrands (HBI) is making aggressive moves to be profitable by making continuous acquisitions. Due to challenging market conditions, Hanesbrands has acquired Maidenform and is now focusing on other inorganic growth opportunities. According to Hanesbrands management, the company will have acquisitions as its primary growth strategy in the future as well. So Hanesbrands can be a potential threat to L Brands if it doesn’t keep a check on its moves.

Hanesbrands has benefited a lot from its Maidenform acquisition due to lower cotton costs and new products such as Vapor quick-dry fabric and Smart Size bras, sending shares up 90% in the last year. Hence, the company’s expertise in making acquisitions and integrating them successfully is laudable. So, if Hanesbrands’ continues to acquire more companies, it could take market share away from L Brands.

Conclusion

Although L Brands put in a mixed performance in the fourth quarter, the company is making some good moves to grow the business. International growth, along with focus on margins, and the brand equity of the Victoria’s Secret brand are important catalysts that could propel shares higher going forward.


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