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Why Is L Brands (LB) Up 13.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for L Brands (LB - Free Report) . Shares have added about 13.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is L Brands due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

L Brands Q4 Earnings Surpass Estimates, Comps Rise 10%

L Brands, Inc. registered decent fourth-quarter fiscal 2020 performance. Strength at Bath & Body Works segment and improved performance at Victoria’s Secret drove the quarterly results. Although sales fell short of the Zacks Consensus Estimate, earnings surpassed the same. Impressively, both the top and the bottom lines continued to improve year over year. This prompted management to provide an upbeat earnings view for the first quarter of fiscal 2021.

Evidently, L Brands remains focused on managing inventory, optimizing capital expenditures and reducing overhead expenses. Markedly, the company in co-operation with suppliers has been identifying opportunities to lower merchandise costs. Reduced promotional activity, better merchandise assortment and growth in the direct channel have been helping the company navigate through the pandemic-hit environment.

The company also remains on track with its previously announced profit improvement plan and intends to generate approximately $400 million in annual savings. Management informed that approximately half of the savings were realized in the back half of 2020, primarily at Victoria’s Secret unit. It added that the remainder is anticipated to be realized in the first half of 2021.

Quarterly Discussion

L Brands delivered adjusted earnings of $3.03 per share that surpassed the Zacks Consensus Estimate of $2.99, marking the third straight beat. Remarkably, the quarterly earnings improved significantly from $1.88 reported in the year-ago period. This year-over-year increase can be attributed to better-than-expected sales and margin rates at both Bath & Body Works and Victoria’s Secret.

Net sales of $4,817.9 million missed the Zacks Consensus Estimate of $4,954.3 million but improved 2% on a year-over-year basis. Comparable sales (stores and direct business) rose 10% during the quarter against 2% decline in the year-ago period. Again, comparable sales (stores only) fell 3% compared with a decline of 4% in the prior-year quarter.

Adjusted gross profit increased 26% year over year to $2,306.9 million during the quarter, while adjusted gross margin expanded 900 basis points to 47.9%. This expansion was driven by an improvement in the merchandise margin rate and buying and occupancy expense leverage. Adjusted operating income amounted to $1,272.6 million, up considerably from $806.7 million in the year-ago quarter. Notably, adjusted operating margin increased to 26.4% from 17.1% in the prior-year period.

Adjusted SG&A expenses rose 1% to $1,034.3 million during the quarter. As a percentage of net sales, SG&A expenses contracted 20 basis points to 21.5%.

Segment Discussion

Bath & Body Works’ total sales increased 22% year over year to $2,718.2 million. While comparable sales (stores and direct business) surged 22%, comparable store sales increased 9%. Sales were robust across all merchandise categories. The company witnessed growth across categories, namely Home Fragrance, Body Care, Soaps and Sanitizers. In the stores channel, sales were up 9% to $1,903.3 million, while direct channel sales soared 74% to $749.5 million. Sales at Bath & Body Works International advanced 16% to $64.5 million.

Adjusted operating income for the segment was $913.7 million, up about 38% from the year-ago period. Notably, adjusted operating margin expanded 380 basis points to 33.6% due to the merchandise margin rate increase, and buying and occupancy expense leverage. The merchandise margin rate rose significantly during the quarter, thanks to favorable customer response to merchandise assortment that enabled management to pull back promotional activity.

Total sales for Victoria’s Secret declined 15% to $2,099.7 million. Comparable sales (stores and direct business) decreased 3%, including comparable store sales decline of 18% due to soft traffic. Notably, sales in the direct business surged 33% to $831.1 million, while digital penetration increased to 42% compared with 28% in the year-ago period. The company witnessed strength across its Lingerie, PINK and Beauty businesses. Moreover, merchandise margin rate rose meaningfully in the quarter owing to efficient inventory management, strong selling execution in stores and online, and positive response to merchandise assortments that allowed management to lower promotional activity. However, we note that sales in stores fell 30% to $1,162.3 million during the quarter. Sales at Victoria’s Secret International declined 47% to $106.3 million.

Adjusted operating income for the segment came in at $403.4 million, up sharply from adjusted operating income of $193.6 million reported in the year-ago period. Remarkably, adjusted operating margin surged to 19.2% from 7.8% in the prior-year period.

Store Update

As of Jan 30, 2021, company-operated stores were 2,669, comprising 1,736 Bath & Body Works and 933 total Victoria's Secret stores. Total Victoria's Secret stores include 703 Victoria’s Secret, 143 PINK, 23 Victoria’s Secret Canada, two PINK Canada, 36 Victoria’s Secret Beauty and Accessories, and 26 Victoria’s Secret China.

Total partner-operated stores were 746, including 270 Bath & Body Works, 103 Victoria’s Secret, 17 PINK and 195 Victoria’s Secret Beauty & Accessories. Further, partner-operated stores comprised 143 and 18 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

With respect to Bath & Body Works segment, L Brands concluded 56 North American real estate projects in fiscal 2020. Of these 26 were new non-mall stores, one new top-tier mall store and 29 remodels. The company shuttered 30 stores, of which 26 were mall-based locations. We note that the company opened 14 new international stores and closed four in fiscal 2020. Additionally, it launched 16 new international digital sites. In fiscal 2021, L Brands is targeting roughly 50 new outlets, almost entirely off-mall North American stores. It plans to close 20-40 stores, primarily mall-based locations. The company expects its partners to open another 50-70 new international locations.

Talking about Victoria’s Secret division, L Brands permanently closed 241 stores in North America in fiscal 2020. The company plans to close another 30-50 North America stores in fiscal 2021. In fiscal 2020, the company expanded its digital footprint with additional web and social commerce sites to a total of 15 across partner and company owned operations. In fiscal 2021, it will launch another 20 websites.

Other Financial Details

L Brands ended fourth quarter with cash and cash equivalents of $3,902.5 million, up from $1,498.7 million at the end of the prior-year quarter. Long-term debt increased to $6,366.1 million from $5,486.9 million a year ago. Total inventories declined 1% to $1,272.5 million. Shareholders’ deficit was $658.7 million. Management incurred capital expenditures of $28.2 million in the quarter under review. For fiscal 2021, the company is estimating capital expenditures in the range $350-$400 million.


Management is advancing with its plan to separate Bath & Body Works and Victoria’s Secret businesses. It is targeting to complete the same in August. The company said “Over the next 6 months, we will continue to work toward the separation of the two businesses, proceeding down a dual track to prepare for either a spin-off or a sale.” Given the impending separation and continued uncertainty due to the pandemic, the company did not provide fiscal 2021 guidance. However, the company issued first-quarter view.

L Brands now envisions first-quarter fiscal 2021 earnings between 35 and 45 cents a share, which reflects a sharp increase from the year-ago period. We note that the company had reported a loss of 99 cents a share in the prior-year quarter as stores were closed in mid-March last year due to the coronavirus pandemic.

The company anticipates first-quarter sales to be roughly flat compared with first-quarter fiscal 2019 levels of $2.6 billion. This suggests that sales growth at Bath & Body Works segment would be offset by a decline at Victoria’s Secret on account of permanent store closures. Management envisions gross margin rate to be up meaningfully, driven by a significant increase in the merchandise margin rate and buying and occupancy expense leverage.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 1925.76% due to these changes.

VGM Scores

Currently, L Brands has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.


Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise L Brands has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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