L Brands, Inc. (LB, Financial) is a $24.45 billion market cap company, which operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products and accessories under various trade names.
Growth Drivers
The company has built a well-known portfolio and consolidates a leading position in the intimate-apparel segment.
L Brands focuses on international expansion as well as new product developments in order to grow revenue. But sales growth must be accompanied by an improvement in margins. We believe that certain actions tend to it, such as large scales, expense improvement or inventory management.
The firm could expand and reach other markets apart from North America. International markets are not in a maturing stage, as can be seen through the number of stores, with over 300 key brand stores worldwide and about 10 international company-owned stores in countries such as Canada and the U.K.
Key Brands
The firm decided to divest in some brands, while key brands like Victoria's Secret and Bath & Body Works are market leaders. Both brands account for almost all (90% or more) of total sales.
Business Model
The franchise model is characterized by allowing the control over its partners and this is very important in this type of business. Also, things related to prices, storing or promotions are under the umbrella of the model.
Management
EO Leslie Wexner is a giant of the retail world for the last 50 years, with a remarkable performance and style to run the company. The fact that he is the largest shareholder of the company is a very interesting point because it allows aligning his incentives with those of shareholders.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 5.06% and powered earnings per share increased in the first quarter compared to the same quarter a year ago ($0.84 vs $0.53). The net income increased by 59.2% when compared to the same quarter a year ago, to $250.00 million from $157.00 million.
Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits)”. He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.
The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)
Let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.
| Ticker | Company | ROC (%) |
| LB | L Brands Inc. | 74.66 |
| URBN | Urban Outfitters Inc | 33.24 |
| TJX | TJX Companies | 90.69 |
| ANF | Abercrombie & Fitch Co | 4.36 |
| Ă‚ | Industry Median | 17.99 |
The ROC is higher than 91% of the 896 companies in the industry and is higher than the industry median and the ones show by Urban Outfitters (URBN, Financial), TJX Companies (TJX, Financial) and Abercrombie (ANF, Financial).
It is very important to understand this metric before investing and it is important to look at the trend in ROC over time.
| Quarter Ended | Jan13 | Apr13 | jul-13 | oct-13 | Jan14 | Apr14 | jul-14 | oct-14 | Jan15 | Apr15 |
| ROC (%) | 153.72 | 64.33 | 69.64 | 36.82 | 145.44 | 60.11 | 63.04 | 44.28 | 150.99 | 74.66 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 22.03x, trading at a slightly premium compared to a median of 22.0x for the industry. To use another metric, its price-to-sales ratio of 2.16x is above the industry average of 0.72x.
Final Comment
As outlined in the article, Victoria's Secret dominates the intimate apparel market, with a large market share percentage. Further, the company can have more room to focus on core brands, due to the divestitures of unprofitable businesses.
International regions are key areas for the future. Further, international reach through franchise relationships or investments to support growth are important drivers in the long-term.
The PE relative valuation and the return on equity that significantly exceeds the industry median, as well as the important insider trading activity make me feel bullish on this stock.
Manning & Napier Advisors, Inc was bullish in the second quarter of 2015, increasing the stake by 21.33% to 41,776 shares. Among other investors, Murray Stahl (Trades, Portfolio) had 1.27 million shares valued at $119.9 million as of March 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned
