- Owns 2 major brands: Victorias Secret (underwear) and Bath & Body Works (like Body Shop).
- 2/3rd of operating profit is from Victoria's Secret, 1/3rd from B&BW.
- 97% of profits from US & Canada. They have only recently started expanding e.g.: opened flagship stores in China and Singapore last year.
- While B&BW has been growing, Victoria's Secret has suffered declining sales in the past 2 years, causing their stock price to drop almost 50%. Last week they reported their first positive monthly comparable-sales number in ten months, driving the stock up 8%.
Competitive Position
They are the largest player in the US: IBISWorld estimates they have over 60% of the lingerie market, Bernstein gives around 30% of the women's underwear market (and increasing).
Victoria's Secret is in the mid-to-slightly-expensive range. They sell at the $35-50 price point, compared to:
- La Perla ($100+ to $700) range
- Gap ($17-$70)
- Target ($10-20)
- Walmart ($8-15)
- Amazon's Iris & Lilly brand ($10) - at these prices, Amazon is not competing with VS.
Changing fashion and Trends
Bralettes - a cheaper bra with no wiring - have become popular recently, hurting VS's profits. However these are only suitable for B-cups and below.A major competitor is American Eagle's Aerir brand. Its aimed at teenagers, and rather than the airbrushed model look, they have the girl-next-door look.
Aerie has has has 15-25% quarterly same-store sales growth for the past 5 quarters.
Source: eMarketerRetail
Victoria Secret's competing brand, Pink, is also growing, but at a lower rate. Their Annual Report states "low double-digit sales growth over last year" (not same-store sales). So Aerie is beating them.
Can this industry be disrupted by online competitors, especially when it comes to offering a better fit and greater variety? I would guess not, but who knows?
The Numbers
L Brand's profits dropped in 2016 and 2017:
Profit breakdown:
Because the "COGS, Buying and Occupancy" costs are one line on the income statement, we can't model their operating leverage (e.g.: An x% drop in sales leads to a > x% drop in profits, due to fixed costs - mostly rental).
ROE is meaningless because the company has long periods of negative shareholder equity! Due to share buybacks and dividends, leaving minimal retained earnings. Shares outstanding have steadily decreased:
Debt is a bit higher than I'd like, at around 6X projected 2017 earnings. Its also been increasing:
I don't like the way they have borrowed in order to buyback shares and pay dividends. Smells like financial engineering. But they are still safely able to pay the interest.
Off-balance-sheet liabilities look OK: Negligible operating leases at 12m. 104m of real-estate guarantees as contingent liabilities.
Conclusion
Buying this is a bet that their 2-year losing streak is over and same-store-sales keep recovering. I'm betting on this because of VS' long history of growing market share, and I think that selling high-priced lingerie online will be difficult.
The stock is cheap, and a recovery is not priced in. Its trading at 13X trailing earnings, and 20X projected 2017 earnings - trough earnings, hopefully. I think it should trade at 15 to 20X earnings. I think the US economy will be strong over the next few years.
I don't want to hold a retail company for years, due to recession risk and changing consumer trends. If same-store-sales and earnings increase over the next year, the stock should be re-rated, and I'll sell.
The stock is cheap, and a recovery is not priced in. Its trading at 13X trailing earnings, and 20X projected 2017 earnings - trough earnings, hopefully. I think it should trade at 15 to 20X earnings. I think the US economy will be strong over the next few years.
I don't want to hold a retail company for years, due to recession risk and changing consumer trends. If same-store-sales and earnings increase over the next year, the stock should be re-rated, and I'll sell.
Misc
- Goldman and Conde Nast 2017 survey: Victoria's Secret among top brands for millennials.
