As with many other retailers, COVID-19 hurt L Brands' (NYSE:LB) fiscal first-quarter results (covering the period that ended May 2). The company reported a $318 million operating loss, compared to operating income of $153 million in the year-ago period. However, this is not merely a blip -- the company's operating income has been declining for several years.
Private-equity firm Sycamore Partners exacerbated L Brands' woes after deciding in April to walk away from its decision to purchase 55% of L Brands' troubled Victoria's Secret business, which consists of its namesake and Pink brands.
These events are in the past, of course. Investors want to know how L Brands will fare in the future when deciding whether the stock represents a buying opportunity. A potential deal involving Victoria's Secret could save the day.
Separating the weak from the strong
Right now, L Brands is stuck trying to turn the Victoria's Secret and Pink operations around by itself. However, it is also working on separating the unhealthy Victoria's Secret and Pink businesses from the strong Bath & Body Works brand. CEO Andrew Meslow stated on the company's first-quarter earnings call:
We are all focused and energized by our opportunities to drive long-term shareholder value, including implementing a profit improvement plan at Victoria's Secret; separating the Victoria's Secret and Bath & Body Works businesses; and continuing to drive strong growth at Bath & Body Works.
In the meantime, management is taking steps to fix its Victoria's Secret business. These include closing unprofitable stores and cutting costs. The company faces a big challenge trying to stabilize the business, but if it can do so, a sale or spinoff would become easier -- which would be a positive, since it would make the poorly performing Victoria's Secret business a stand-alone entity, allowing shareholders to invest directly in Bath & Body Works, which was doing well before the coronavirus pandemic hurt results. The segment's sales have gone from $4.1 billion in 2017 to $5.2 billion last year, and its operating income grew from $953 million to $1.2 billion during the same period.
Why a stand-alone company
There are good reasons to expect the Bath & Body Works business to continue doing well selling body care items, home fragrances, soaps, and sanitizers.
It has been successful by coming out with new and innovative products that have resonated with its customers. You can see the proof in the results, with a 10% same-store sales increase last year. Management has been pushing e-commerce, and this has been working, too. Bath & Body Works' digital sales grew 32% to $958 million in 2019.
Of course, right now, buying shares in L Brands means you get the combined Bath & Body Works and Victoria's Secret businesses, so you may want to wait until the company has announced how and when it will divest Victoria's Secret. After all, anything can happen with the process. Remember, Sycamore Partners backed out of purchasing a majority interest in Victoria's Secret just a couple of months after announcing the deal.
Once a decision has been made, you'll have more clarity. But if this moves along as planned, L Brands -- once it's only the Bath & Body Works business -- looks like a solid investment.