You won't see an L Brands (NYSE:LB) branded store in your local mall, but the company manages stores that you definitely know. L Brands' main two lines are Bath & Body Works and Victoria's Secret. With very little fanfare, L Brands has been growing its business, paying out a dividend, and pushing its stock price up.
With many other apparel retailers stalling out, L Brands might be a good place for investors looking to get one up on the market. Here are the details of the business, and the outlook for the future.
Finding cash in the top drawer
Through L Brands' first two fiscal quarters this year, comparable sales across the company rose 3%. That's a solid increase on top of last year's 2% rise -- and there's already been more good news. The company released October comparable sales earlier this month, and things are continuing on the low-single-digit increase path. With other retailers suffering, there's a lot to be said for L Brands' strength.
Looking over at Gap (NYSE:GPS), for instance, the scene isn't nearly as rosy. In the just-reported third quarter, comparable sales were down 2%, compared to a 1% increase last year. . Gap is a good litmus test for the apparel industry, as it sells a wide range of products targeted at a diverse audience. L Brands' success is starker when compared to the difficult time that Gap has had.
While growing sales, L Brands has also managed to increase its operating margin, growing from 13.9% during the first half of last year to 14.1% this year. That's indicative of the company's ability to keep itself clear of too much discounting in order to drive that increase in sales.
All of this has ended up generating an increase in free cash flow for L Brands. The company lost cash in the first half of 2013, with negative free cash flow of $29 million. This year, the first half generated positive free cash flow of $97 million. It used some of that to pay out its 159th consecutive dividend payment at the beginning of September. The stock currently yields 1.7% and the share price is up 35% so far this year.
Looking forward at L Brands
There's still more work that L Brands can do to get sales higher and generate even more dividend-funding cash. Direct revenue -- from online and catalog sales -- at Victoria's Secret has had a weak year, with sales flat against 2013. Those sales account for around 20% of total Victoria's Secret brand sales, so any increase there would have a meaningful impact on total sales.
The company is also expanding overseas, opening Victoria's Secret Beauty & Accessory locations across the world, pushing the Bath & Body Works brand into new locations, and managing a portfolio of Victoria's Secret locations. Sales and margins overseas have been strong, and the business is going to be continuing its push during the next year.
All of the potential growth at L Brands has the company poised for an excellent end to 2014 and a strong start to 2015. With the consistent dividend payment as icing on the cake, L Brands looks like an overlooked winner in a sector that's having its fair share of trouble. Investors looking for exposure to the U.S. retail market should give L Brands a closer look.
Andrew Marder 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.