- L Brands expects to deliver half of $400 million in annual cost savings in the second half of 2020.
- L Brands has closed 239 Victoria’s Secret shops in the U.S. and Canada this year, and is cutting overhead costs in China.
- Bath & Body Works sales surged 55% to record levels during the quarter.
The situation wasn't looking good for L Brands (NYSE:LB) earlier this year. Flagging sales at its Victoria's Secret business were taking a toll on the retailer. Sycamore Partners came to the rescue with an offer to take a majority stake in the struggling lingerie chain, but relief was short lived. The private equity firm soon dropped the deal amid the heightening coronavirus outbreak.
At this point, we could have expected a grim ending to the L Brands story. Instead, management set into action to turn things around. And so far, it seems L Brands is on the right path. As a result, shares have rebounded more than 300% from their March low. So, is now the time to buy L Brands? Let's take a closer look.
L Brands in May announced its Go-Forward strategy. The plan is to operate the stronger Bath & Body Works brand as a pure-play public company, and Victoria's Secret will become a stand-alone business. L Brands expects to deliver about $400 million in annualized cost savings through efforts including job cuts at the home office, inventory management, and store closures.
About half of those savings should happen in the second half of 2020, the company said during its earnings report this month. As part of the plan, L Brands has closed 239 Victoria's Secret shops in the U.S. and Canada so far this year. In Hong Kong, the company closed the flagship Victoria's Secret store. And the retailer restructured lease terms on two flagship stores in mainland China and launched a plan to cut overhead costs there.
Earlier this fall, L Brands said its Victoria's Secret U.K. business would form a joint venture with Next Plc. Next will hold 51% of the venture, and Victoria's Secret will own 49%. L Brands expects the move to boost the chain's U.K. sales and offer growth opportunities. Next is the third-biggest clothing retailer in the U.K. by market share, Statista research shows.
Of course, it's too early to see the impact of the Next deal. But some of L Brands' efforts have started to bear fruit. In both the second and third quarters, L Brands' earnings per share surpassed analysts' estimates. The company last week reported adjusted third-quarter earnings per share of $1.13 -- where average consensus estimate was only $0.09 -- up from $0.02 a share in the same period last year. Victoria's Secret's total comparable sales rose 4% in the quarter. Sleep and loungewear were among growth drivers as customers spent more time at home. And Victoria's Secret's margin rate improved due to inventory management and customers' connection with the current product offerings.
The holiday shopping season
Still, Victoria's Secret's total third-quarter sales fell 14%. And L Brands said that, for both of its brands, it is cautious regarding the fourth quarter. A concern is that limits on store hours and capacity may hurt sales over the holiday period -- especially since this year's holiday sales figures will be compared to those of last year, when these sorts of limits were not in place.
L Brands shares have climbed 120% this year. After the recent earnings report, they surpassed Wall Street's average 12-month price estimate. And the company's price-to-sales ratio (the stock price in relation to the company's revenue) has reached its highest level in about two and a half years.
Of course, Bath & Body Works remains a strong revenue driver for the retailer. The chain's third-quarter sales soared 55% to a record $1.7 billion. And the progress at Victoria's Secret mentioned above should make us optimistic about more to come. But I'm concerned that a lot of that good news may be priced in at the stock's current level. And that's why, ahead of what may be a difficult holiday season, I wouldn't run out and add this retail stock to my shopping list.