What happened
Investors are cheering a business update from L Brands (LB 4.42%), owner of the Victoria's Secret and Bath & Body Works retail chains. The company plans to cut annual costs by $400 million going forward -- a crucial move considering it's facing a steep drop in revenue from disruptions caused by the COVID-19 pandemic.
As of 12:40 p.m. EDT, L Brands stock was up a whopping 33% for the day.
Image source: Getty Images.
So what
A large part of L Brands' annualized savings moving forward will come from layoffs. The company is laying off about 850 people from its corporate home office -- about 15% of its total. These layoffs will cost it $75 million in the second quarter between severance and ongoing benefits, but the company expects to save money in the long term.
L Brands is also closing down about 250 Victoria's Secret locations. The move isn't necessarily surprising. The company already tried to sell majority ownership of the chain, only to have the deal fall through because of the coronavirus. Stuck with it, the company has watched the women's apparel chain struggle in 2020. For upcoming second-quarter results, L Brands expects to report a 40% year-over-year drop in Victoria's Secret's sales.
Now what
Long term, L Brands' management intends to separate Victoria's Secret and Bath & Body Works into different companies. That's likely a smart move. It will allow it to get some value from a stumbling Victoria's Secret brand while retaining the growing Bath & Body Works chain. The company expects to report a 10% increase in Bath & Body Works' Q2 sales -- surprising growth for a retail chain during the coronavirus pandemic.
While $400 million in annualized savings through layoffs and store closures improves L Brands' finances, investors should proceed with caution and skepticism. Today's moves take steps back now in order to go forward later. But turnaround plans are easier said than done.
