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L Brands (LB) Gains on Plans to Lower $400 Million in Costs

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Shares of L Brands, Inc. (LB - Free Report) shot up roughly 12.4% during the after-market trading session on Jul 28, following the company’s update on its “Go-Forward Strategy.” The Columbus, OH-based company highlighted its plan to lower annual costs by approximately $400 million. Further, management remains committed toward making Bath & Body Works chain a “pure-play public company” and Victoria’s Secret, “a separate, standalone company,” after the latter’s buyout deal with Sycamore Partners fell through.

The company, which has been hit hard by the ongoing pandemic, expects to attain cost savings on the back of its profit improvement plan for Victoria’s Secret business, and actions to decentralize and streamline shared corporate and other functions. Of the targeted cost reduction plan, the company anticipates to accomplish roughly $175 million during fiscal 2020. We note that the company expects to register pre-tax severance costs of about $75 million in the second quarter due to the downsizing of the workforce.

In order to reduce overhead expenses and decentralize significant shared corporate and other functions to create standalone companies, L Brands is preparing to reduce 15% of its corporate staff or roughly 850 employees. Notably, management is taking every step to improve the performance of Victoria’s Secret business, which involves inventory management, lowering of store selling costs and negotiation for ongoing rent relief. It comes as no surprise that store optimization plan is also on the cards with the company intending to shut approximately 250 Victoria’s Secret stores in the fiscal year.

Markedly, the company in co-operation with suppliers has been identifying opportunities to lower merchandise costs. This would help improve merchandise margin rates at Victoria’s Secret. Due to this initiative, Spring inventory receipts for Victoria’s Secret were already down about 45% on a year-over-year basis. For the Fall, the company expects receipts to be down approximately 50% compared with the last year. Additionally, L Brands is trying all means to lower operating losses in the company-owned businesses in the U.K. and China.

As part of its business update, the company informed that most of the Bath & Body Works and Victoria’s Secret stores in North America are now operational and witnessing robust sales. For the second quarter, management envisions net sales to be down approximately 20% from the year-ago period. This compared favorably with the Zacks Consensus Estimate, which suggests a decline of about 28.2% year over year.

L Brands expects sales to increase roughly 10% at Bath & Body Works segment but decline approximately 40% at Victoria’s Secret. Impressively, total direct channel sales at both businesses are up substantially compared with the last year, offset by a fall in store sales. Stores were closed at some point during the quarter due to the pandemic. As of Jul 24, the company’s cash balance was more than $2.5 billion and no amounts were drawn under its $1 billion asset-backed loan facility.

Shares of this Zacks Rank #3 (Hold) company have surged 60.8% in the past three months compared with the industry’s rally of 17.2%.

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