Please ensure Javascript is enabled for purposes of website accessibility

Why L Brands' Third-Quarter Numbers Were Out of Fashion

By Motley Fool Staff - Nov 23, 2018 at 11:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The parent company of Victoria's Secret had few upbeat metrics to report.

Oscar Wilde once quipped, "Fashion is a form of ugliness so intolerable that we have to alter it every six months," which can be a real bummer for apparel companies trying to stay fresh and relevant. Case in point: L Brands (BBWI 3.57%), which lost money, took some hefty charges, and sliced its dividend in half as its major chain, Victoria's Secret, continued to lose ground with consumers. Victoria's Secret comps were down 2%, and the trends do not look good.

Even Bath & Body Works' solid results weren't enough to make MarketFoolery host Chris Hill and Motley Fool Asset Management's Bill Barker smile -- though its candle names usually do. In this segment, they consider the outlook for L Brands and its various chains -- and try to figure out what peppered suede ought to smell like.

A full transcript follows the video.

This video was recorded on Nov. 20, 2018.

Chris Hill: Our email address is marketfoolery@fool.com. Question from Sam Horne in Boston, where it's about to become very cold. Sam writes, "One of the first dozens of listeners here. I've noticed you guys have not mentioned L Brands over the past year, but have touched on other victims in the retail apocalypse. Would love to hear your thoughts on the long-term ability to invest in fashion/brands. Thanks." Thank you, Sam, for that.

What a coincidence. Actually, on our schedule to discuss today, L Brands reporting third quarter results. This is the parent company of Victoria's Secret and Bath & Body Works. Whatever nice things showed up in the third quarter report were overshadowed by the fact that L Brands announced it's cutting its dividend in half. That's a little surprising.

Bill Barker: I'd be hard-pressed to tell you what the good things are that showed up in the third quarter.

Hill: Versus expectations.

Barker: Well, they lost money. Part of that was due to massive write-offs for two things. One, they are eliminating Henri Bendel. Maybe it's [with a French accent] Henri Bendel.

Hill: You can pronounce it however you want. [laughs]

Barker: [laughs] You can get in trouble for pronouncing things wrong on this show! You've done it.

Hill: Sure.

Barker: Mostly with your Swedish pronunciations.

Hill: Yeah. I struggle there.

Barker: That's a charge. The secondary charge, actually a much larger charge, is the $80 million -- although it is non-cash -- impairment charge related to the Victoria's Secret store assets. That indicates that they have spent money building stores, and they now have to write down some of those costs, because it doesn't look like they're going to recoup the investment on certain store investments. This is a problem. They're taking charges, acknowledging that they've misallocated capital. They're shutting down a brand. It wasn't a huge part of the business, but still, not a good sign.

The weakness is really in the Victoria's Secret brand, more than elsewhere. For the third quarter, comps were down 2%. And that's the largest chunk of the business. Comps were up 13% at Bath & Body Works, which I'm sure we'll get to. That's a better side of the story. But the long-term trend is that Victoria's Secret is not resonating with its customers.

Hill: Yeah. I was going to say, in terms of bright spots, certainly the Bath & Body Works results looked good. They raised guidance for the full fiscal year. That's theoretically a bright spot. Bath & Body Works, this has come up in the past, maybe about a year ago, maybe after the holidays. We were talking about their large, three-wick candles, and the unusual scents that they have. I've talked about the people that the Oreo division of Mondelez being drunk with power. I think, to a smaller degree, whoever is greenlighting the various scents of candles and Bath & Body Works are saying yes to everything.

Barker: You could just go back and replay rather than us revisiting our thoughts on Sweater Weather and Black Tie and --

Hill: Peppered Suede!

Barker: Flannel.

Hill: Flannel! Would you like a flannel-scented candle? If you set flannel on fire, it's usually not a great smell.

Barker: You're actually packing some Peppered Suede right next to you.

Hill: Yeah, one of the dozens sent in a Peppered Suede candle.

Barker: Really, when you're having some suede, you think, "This could do with a little more pepper." Now they've done it for you.

Hill: You're welcome, America.

Barker: You don't want to have any suede that's ...

Hill: Bland.

Barker: Yeah.

Hill: When we had talked about this before, we were talking about the different scents, but also the fact that this candle, which is nearly a pound in weight --

Barker: In some states, you have to register that.

Hill: Oh, yeah. This is a blunt object. In fact, it wouldn't surprise me if this showed up in a police report somewhere.

Barker: Not that we're advocating that.

Hill: Not that we're advocating that. I'm just saying that if you wanted to use this as a weapon --

Barker: If you have to defend yourself, if somebody's an intruder, have a couple of Bath & Body Works' three-wick candles on hand, you have a better chance of getting out of that situation.

Hill: One of the things that I took the company to task for was the fact that, you've got these unusual scents, but also, you're selling this candle for nearly $30. They were selling these candles for $27. I just thought, come on! You're not going to get me interested in that! Someone just posted in The Motley Fool Podcast Group on Facebook that the good people at Pringles came out with a creative box of Thanksgiving-dinner-flavored Pringles. You could get me interested in that, but not if it's $15 a box, which is what they're doing. It's like, come on, Pringles. I'll try your novelty flavors, but you have to make it attractive from a price point standpoint. Well, it's entirely possible that someone at Bath & Body Works was listening to that podcast, because you go to their website, bathandbodyworks.com, and immediately, you're bombarded with the candles. They're less than half the price they were a year ago.

Barker: They're so cheap, you can't afford not to buy them.

Hill: Exactly! Creative scents like Merry Cookie, Fresh Balsam, Twisted Peppermint -- my hunch is that Peppermint and Twisted Peppermint probably have similar scents, but maybe I'm wrong on that. Champagne Toast.

Barker: Twisted Peppermint has a little bit more of an edge to it.

Hill: Yeah, it's the edgy one. It's a good-looking rebel candle that plays by its own rules. Vanilla Snowflake. Fireside. I don't think you want to put a large candle right next to the fire.

Barker: Here's a challenging one: Wine Cellar.

Hill: You tell me "Wine Cellar," I think musty. [laughs]

Barker: [laughs] Yeah. I wouldn't think that a cellar is something that connotes good smell.

Hill: No, not really.

Barker: Not any of the cellars that I've ever owned.

Hill: Right. Or that have ever appeared in movies. [laughs] There's never been a time where you're watching a movie and they go down to the cellar and you think to yourself as a viewer, "I bet that smells delightful!"

Barker: No. You'd better be armed with a candle if you're going to go down to the wine cellar that's in a movie. There's usually trouble down there.

Hill: We're poking a little bit of fun at Bath & Body Works in the wake of a third quarter where it was by far so much better, from a business standpoint, than Victoria's Secret was.

Barker: Part of the reason is, for us to go into the details of what is sold at Victoria's Secret is a danger zone that we should stay away from.

Hill: Right.

Barker: Right.

Hill: Right.

Barker: Nobody wants that.

Hill: Nobody wants that. And frankly, this is more fun. This is a lot more fun, to talk about Wine Cellar as a scent.

Barker: But, to go to the number, which we can do without getting into too much trouble, Victoria's Secret comp sales for the whole brand were down 2%. In-store, they were down 6%, which is another data point about the reduced attractiveness of having a lot of mall-based stores. That's what Victoria's Secret is largely saddled with. On top of that, they had a couple of announced departures. Victoria's Secret's CEO is departing. That's not the L Brands CEO. It's another individual. But the Victoria's Secret CEO is a very, very important part of the company. She's departing. That's yet another thing on top of the dividend cut, the decreased comps. I don't know where the good news is in here.

And this is something which, a couple years ago, I think you could have said, "What store, what fashion brand do you have more confidence in continually getting it right and not missing the fashion trend and where things are going?" Because that happens to all fashion brands sooner or later. And now, including this one. They're just on the wrong side of where their customers want to shop.

Hill: One last scent on the Bath & Body Works candles. Again, I'm not sure what this is. There's a scent entitled 'Tis The Season. There you go. 'Tis The Season.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
BBWI
$27.88 (3.57%) $0.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.