The COVID-19 pandemic crushed L Brands' (BBWI -0.02%) results in the first quarter of fiscal 2020, as the company was forced to close its Bath & Body Works, Victoria's Secret, and PINK stores in March. Sales plunged 37% year over year and the company reported an adjusted net loss of $275 million ($0.99 per share). The pandemic also scuttled a deal to sell a majority stake in the struggling Victoria's Secret/PINK business to Sycamore Partners (a retail-focused private equity firm).

However, L Brands' business came roaring back in the second quarter -- along with L Brands stock. The stock's momentum continued after the company's earnings release last week. Let's investigate the results and the outlook for L Brands stock.

LB Chart

Data source: YCharts.

A big comeback quarter

In late July, L Brands announced an aggressive plan to slash costs by $400 million annually through overhead cost reductions and significant spending cuts throughout the Victoria's Secret segment. In conjunction with that announcement, the company provided a bullish update on business trends, noting that Bath & Body Works had returned to year-over-year growth in the second quarter, partially offsetting continued sales declines at Victoria's Secret. L Brands projected that total revenue would fall by about 20%: a sequential improvement from Q1.

Management filled out the details last week. The specialty retailer's total revenue did indeed fall 20% year over year to $2.3 billion. However, comparable sales -- a metric that excludes stores during periods when they were closed -- surged 123% for Bath & Body Works and 28% for Victoria's Secret.

Additionally, careful inventory management and better-than-expected demand enabled both of L Brands' business segments to expand their merchandise margins on a year-over-year basis. This helped the company to slightly increase adjusted gross margin (to 34.1% from 33.9% a year earlier), despite the negative impact of spreading fixed expenses across a smaller sales base.

The interior of a Bath & Body Works store

Image source: L Brands.

L Brands also reduced operating expenses significantly, including a sharp pullback in marketing spending. The net result was that adjusted earnings per share ticked up to $0.25 from $0.24 a year earlier, notwithstanding the impact of the pandemic.

Firing on all cylinders for now

Management acknowledged that comparable sales growth was bolstered by temporary factors last quarter. First, there was pent-up demand, particularly at Bath & Body Works. Second, with many stores closed for a substantial part of the quarter, those that were open and the company's e-commerce channel naturally posted stronger comp sales growth.

However, Bath & Body Works is also turning into a pandemic winner. Unsurprisingly, sales of soaps and sanitizers have surged. The brand is capitalizing on strong demand for home-related items, too. Management said that Bath & Body Works' stores were still posting "very strong double-digit comps" at the end of the quarter, by which point most stores had been open for a while.

Thus, while management did not provide formal guidance, it appears that results may improve again sequentially in the third quarter. That has contributed to L Brands stock's recent rally.

Two big questions for the future

In recent years, the once high-flying Victoria's Secret business has unraveled. Just five years ago, it generated operating income of $1.4 billion on $7.7 billion of revenue, putting its operating margin just over 18%. By fiscal 2019, sales had fallen to $6.8 billion and operating income (excluding special items) was just $125 million, putting the segment's adjusted operating margin at less than 2%.

L Brands hopes to spin off or sell Victoria's Secret to focus on the faster-growing Bath & Body Works business. Rescuing Victoria's Secret from this free fall will be crucial to pulling off a separation of the two businesses.

The entrance to a Victoria's Secret store

Image source: L Brands.

So far, there are modest signs of progress. Cost reductions, aggressive closures of underperforming stores (mainly in weak malls), better product selection, and tighter inventory management all have the potential to boost profitability, even if sales continue to decline. Driving profit growth at Victoria's Secret would help reinforce the value of L Brands stock.

On the flip side, Bath & Body Works has been growing steadily in recent years. Operating income reached $1.2 billion on revenue of $5.2 billion in fiscal 2019, giving the segment a stellar 23% operating margin. If anything, the pandemic could accelerate the brand's long-term growth. With L Brands' market cap currently sitting near $8.2 billion (and its enterprise value at $12.3 billion), L Brands stock appears modestly priced for a growth company.

That said, Bath & Body Works has no moat to protect its phenomenal margins other than its brand and merchandise savvy. The rapid decay of Victoria's Secret over the past five years shows how fleeting such competitive advantages may be. As a result, I'm steering clear of L Brands stock despite its solid near-term trajectory.