L Brands (NYSE:LB) closed fiscal 2013 on a disappointing note with its fourth-quarter revenue declining on a year-over-year basis. Its results were a mixed bag as the company met analysts' estimates on earnings, but fell behind on revenue. Amid a challenging environment for most retailers, L Brands' results were no different. For example, peer Hanesbrands (NYSE:HBI) is looking at inorganic growth through acquisitions as there is not much scope for organic margin growth, according to Stifel Nicolaus, which had downgraded the stock to neutral from outperform.
However, L Brands management is putting in a lot of effort to improve the fundamentals of the business going forward.
Better times ahead
L Brands is one of the largest retailers of women's apparels, with Victoria's Secret being its most well-known brand. Victoria's Secret posted mixed numbers in the last quarter, despite getting off to a solid start and achieving single-digit growth. Promotional activities had a negative impact on the margins, however. Going forward, L Brands is working toward increasing Victoria's Secret's market share. Short-term margin sacrifices could result in long-term gains.
Victoria's Secret is planning to roll out new products, and it is especially excited about its spring assortment. The company remains conservative, though. According to Victoria's Secret's CEO, "We will be conservative in our expectations for the season, and we will leverage speed to read and react to performance in terms of our investments in inventory and expenses." Management is trying to maintain a balance between increasing sales, and is also focusing on its margins at the same time. The brand is investing in real estate and customer-focused initiatives in an effort to drive growth going forward.
L Brands' investments in the Victoria's Secret brand can be seen in a solid international performance. L Brands is taking the brand overseas, encouraged by its strong performance so far. Currently, it has 34 stores in Canada and is planning to open seven more. The retailer already operates in Canada with its La Senza brand, and Victoria's Secret will help it to tap more of the Canadian market as well. In the U.K, L Brands' PINK brand is also moving forward at a steady pace. The four stores that L Brands had opened last year continue to perform well, and it plans to open six more stores this year.
Apart from this, L Brands' beauty and accessories business, where it operates under the brand Bath & Body Works (BBW), also has various expansion plans. Canada alone has 79 Bath & Body Works stores and the company plans to add another 10 stores this year in the region. L Brands has similar expansion plans for BBW in other regions such as the Middle East, Southeast Asia, and Latin America, and expects to open another 20 to 30 franchise stores this year.
Overall, L Brands opened a total of 160 international locations last year, taking the total count to 863. This was instrumental behind the company's operating income growth last year, and is supposed to be one of the main reasons behind its improved performance this year.
For the current fiscal year, L Brands is looking at earnings between $3.00 and $3.20 per share, better than last year's performance of $3.05 per share at the mid-point. While this growth might not seem like much, it is nevertheless impressive since the company has been making aggressive investments to grow the top line.
A potential threat
However, L Brands has to face tight competition from Hanesbrands, which is aggressively growing its business through acquisitions. It's been less than six months since Hanesbrands closed the acquisition of Maidenform, but it is now looking at more inorganic growth opportunities. Richard Noll, the Chief Executive of Hanesbrands, recently said that the company's priority is growth through acquisitions, according to The Wall Street Journal.
Hanesbrands has benefited a lot from its Maidenform acquisition due to lower cotton costs and new products such as Vapor quick-dry fabric and "Smart Size" bras, sending shares up 90% in the last one year. Hence, the company's expertise in making acquisitions and integrating them successfully is laudable. If Hanesbrands' continues to acquire more companies, it could take market share away from L Brands.
From an investment perspective, however, L Brands is cheaper than Hanesbrands. L Brands has a trailing P/E of 18.47, and a forward P/E of 15.56 points toward earnings growth. Comparatively, Hanesbrands is expensive at a trailing P/E of 22.55. L Brands also has a superior dividend yield of 2.40% as compared to Hanesbrands' 1.60%.
Although L Brands put in a mixed performance in the fourth quarter, the company is making some good moves to grow the business. International growth, along with a focus on margins, and the brand equity of the Victoria's Secret brand are important catalysts that could propel shares higher going forward.
Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.