L Brands (NYSE:LB) is quite a niche company, and its key brands include Victoria's Secret and Bath & Body Works. These two premium names are easy "trade downs" when the economy weakens.
However, when the economy does well, so do discretionary products. Hence, L Brands, and its key peers, Chico's (NYSE:CHS) and Ascena Retail (NASDAQ:ASNA), have been on an absolute tear over the past five years, with each up around 400% or more. This comes after the economy bottomed out in 2008, and has since been on the rebound.
You will be happy to know this trend looks like it will continue over the next couple of years. Chico's brands include White House / Black Market and Soma Intimates. Soma is a brand that sells lingerie to women 35 and older, while White House / Black Market caters to women looking for alternatives to designer fashion items. Meanwhile, Ascena is a women and teen girls apparel retailer, owning the dressbarn, maurices, and Justice brands.
Expansion drives growth
While these companies should do well as the economy strengthens, the one that appears to have a lot going for it, including unrivaled brand recognition, is L Brands. And one of L Brands' biggest opportunities lies in international expansion. The company will focus on Southeast Asia, the U.K. and the Middle East.
L Brands already has over 800 stores overseas. In the U.K., the company believes there is a $1 billion opportunity for Victoria's Secret. Meanwhile, Southeast Asia, even excluding China, is expected to be a $1 billion business.
But there are also opportunities in North America. At the company's recent investor conference, CEO Les Wexner, laid-out plans to double the L Brands' North American business. This includes expanding Victoria's Secret to sportswear and swimwear.
Doing everything right
All of L Brands segments are growing nicely. Same-store sales were up 1% for Victoria's Secret stores during the latest quarter, up 3% at Bath & Body Works, and 4% at La Senza. Company-wide, September same-store sales were up 1%, on the back of a 1.6% rise in total sales. The company also noted that 99% of its 2,600 stores are cash flow positive after taxes.
This holiday season could prove very fruitful for L Brands. The company operates in one of the more discretionary areas of retail, with higher-end undergarments, body wash, and soap. Thus, its business is more reliant on the broader economy than other retailers. However, the economy appears to be strengthening, hence, the reason this holiday season could be a big for L Brands. Although not perfect, unemployment is at the lowest levels we've seen in almost five years.
L Brands is also managing inventory better than ever. Its cash conversion cycle is at its lowest levels in 10 years. For the trailing twelve months, its cash conversion cycle is down to 32 days, compared to 55 days in 2009. That means the company is buying inventory, selling it, and collecting the money 18 days faster than five years ago. This compares favorably to the cash conversion cycle of 54 days for Ascena.
L Brands has managed to trade at an average 23 times earnings over the past five years, which, coincidentally, is also the industry average. Taking a forward-looking approach, if L Brands manages to trade at 23 times earnings at the end of 2015, and assuming it meets analysts earnings estimates of $3.59 for 2015 (decade highs), the stock could trade over $82 in just over a year.
Foolish bottom line
Ascena is probably the most diversified retailer here. However, its bread and butter is mostly apparel. Meanwhile, Chico's has an up-and-coming brand with White House / Black Market, but its lingerie brand, Soma, doesn't have the recognition of Victoria's Secret. Thus, L Brands is the best play in this niche women's market.
The big positive for L Brands is that its stores are mall-based. CEO Wexner notes that for malls "the volume potential for food, sit-down restaurants, food-court restaurants, fine dining, the whole mix of things, is probably greater than the department store volume or traffic." That has helped to keep traffic up at L Brands stores.
But more importantly, that should be what continues driving L Brands higher, even as more and more shopping is done online. Intimate apparel and personal care/beauty should prove to be a solid business over the next couple of years.