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L Brands to Sell 51% of Victoria's Secret U.K. Arm to Next

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Women’s apparel retailer L Brands, Inc. (LB - Free Report) has been taking measures to fix its ailing Victoria’s Secret business. In recent developments, management has announced a partnership with the British clothing company Next PLC for the Victoria’s Secret unit in the United Kingdom and Ireland (“Victoria’s Secret U.K.”). A joint venture (“JV”) has been formed between Victoria’s Secret U.K. and Next PLC, where the JV will acquire the majority of the assets of the Victoria’s Secret U.K. business that is currently in administration. Per the accord, Next PLC will own a majority stake of 51% in the newly formed JV. This leaves L Brands with the balance 49% stake.

The latest JV will operate the entire Victoria’s Secret stores across the United Kingdom and Ireland, subject to agreeing to terms with the landlords. The U.K. online business is now operated by Victoria’s Secret in the United States and is likely to be folded into the JV in spring next year. However, the financial details of the agreement, which is subject to regulatory clearance, have been kept under covers. Earlier, L Brands had signed a deal with Sycamore Partners to sell 55% of stake in Victoria Secret for $525 million but that did not materialize.

Unsurprisingly, L Brands’ Victoria’s Secret business has been ailing with fading popularity among customers on rising competition from other intimate-apparel brands. After declining 45.6% in the first quarter of fiscal 2020, total sales at Victoria’s Secret segment declined 39% on a year-over-year basis during the second quarter. While store sales fell 70%, comparable-store sales declined 10% during the quarter under review. Additionally, adjusted operating loss for the segment was $38.9 million against adjusted operating income of $16.6 million in the year-ago period.

Revival Actions

On the flip side, L Brands is taking every step to improve the performance of Victoria’s Secret’s business, which involves inventory management, lowering of store-selling costs through changes in the management structure and labor model, and negotiations for ongoing rent relief. A store-optimization plan is also in the cards. The company remains on track to close approximately 250 stores in the current fiscal year.

While L Brands’ Victoria Secret label has been struggling, the company’s Bath & Body Works segment's performance has been commendable. The lineup witnessed total sales growth of nearly 13% during the second quarter of fiscal 2020, while comparable sales (stores and direct business) soared 123%. In fact, the brand’s direct channel sales performed remarkably, surging 191% in the said quarter.

Going ahead, management expects to keep gaining from the pent-up demand for hygiene products like soaps and sanitizers in this brand category. Body Care and Home Fragrance products have also been performing well. We note that the company, as part of its Go-Forward strategy, continues to be committed to make Bath & Body Works chain a “pure-play public company”.



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