Consumers haven't carved their Halloween pumpkins yet. However, retailers are already gearing up for the all-important 2015 holiday shopping season. November and December are the most important months of the year for retail chains, with most retailers generating as much as 30% of their total annual sales during that time. L Brands (NYSE:LB) is one specialty retailer that looks particularly well poised to dominate the holiday season this year.
A market leader with just enough of a niche
If you're not familiar with the moniker L Brands, there's a good chance you know the company's leading businesses, which include consumer favorites: Victoria's Secret, Bath & Body Works, and Henri Bendel. L Brands operates in categories such as intimate apparel and beauty where there is significantly less competition compared to other corners of retail. Victoria's Secret is the No. 1 lingerie brand in the U.S. with as much as 35% of the market today.
The company's Bath & Body Works franchise is also resonating with consumers these days. Bath & Body Works is now the largest specialty beauty brand in the world -- having captured more than 120 million transactions last year. These two businesses now account for as much as 90% of L Brands total annual sales. Therefore, the strength of Victoria's Secret and Bath & Body Works together creates a favorable environment for the company to grow shareholder returns.
Being a leader in this space hasn't stopped L Brands from expanding into new product categories. Victoria's Secret, for example, moved into the "athleisure wear" arena in 2013 with the launch of its namesake sportswear brand. Its fitness attire line has pulled in annual sales of nearly $250 million since then, and analysts now estimate it could become a billion dollar brand for the company before long.
L Brands proved it has strong momentum heading into the holiday shopping season when it reported September sales recently. The company trounced Wall Street's expectations for a 4% rise in comparable sales and instead posted a 9% increase in same-store sales in the period.
Same-store sales growth or comparable sales growth is important for retailers like L Brands because it tracks sales growth at stores that have been open for more than a year. This is often a better gauge of performance for retailers versus revenue growth, because newly opened stores can deceptively inflate revenue growth.
The 2015 holiday shopping spree
L Brands is doing a lot of things right ahead of the holidays. The company's Bath & Body Works business tends to do especially well during the Fall period thanks to its seasonal selection of merchandise. Both Bath & Body Works and Victoria's Secret have already started promoting limited time items online ranging from Angel's lotion to seasonal hand soaps and fragrances. Moreover, these products tend to sell well during the holidays because they make great gifts and stocking stuffers.
The bulk of L Brands business currently comes from its overwhelming presence in shopping malls. The company now boasts 3,619 mall locations. However, the retail chain has beefed up its digital and mobile initiatives heading into the holiday season. Victoria's Secret direct to consumer or online channel now accounts for 20% of its operating income. Bath & Body Works, meanwhile, increased its online sales by 20% in 2014. The retailer is also hoping to entice holiday shoppers to its e-commerce store with exclusive online deals and merchandise that customers will only find on L Brands' direct to consumer sites.
"Retailers that are likely to come out ahead this holiday season are the ones connecting the dots between their digital channels and their stores–rather than focusing solely on the online 'buy' button," according to Deloitte. L Brands mix of both physical mall stores and exclusive online offerings should therefore bode well for the retailer.
Together these things make a strong case for investors to own L Brands stock ahead of the holidays. Not to mention, the fourth-quarter has historically been L Brands' most profitable period. Last year, the holiday season accounted for as much as a third of L Brands net sales for the year. The stock has gained 16% so far in 2015 and is currently trading around its 52-week high at $95 per share. This may have investors wondering if the stock has already peaked. However, if L Brands is able to ride its recent same-store sales momentum through the holidays there could be more upside from here.