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L Brands (LB) Plans Victoria's Secret Spin-Off, Gives Q1 Update

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L Brands, Inc.’s board has approved plans to spin-off Victoria’s Secret business into a standalone company. The move came in after a prolonged period of strategic analysis of the Victoria’s Secret business, including its sale. Moreover, management stated that a spin-off is likely to offer greater value to shareholders. Additionally, the company reported strong preliminary first-quarter fiscal 2021 sales results. Let’s take a closer look at these developments.

Business Separation is a Prudent Move

The spin-off will result in two independent public companies — Bath & Body Works and Victoria’s Secret. The transaction will be carried out through a tax-free spin-off of Victoria’s Secret to L Brands’ shareholders. Following the separation, Andrew Meslow, CEO of L Brands, will continue to hold his position and lead Bath & Body Works. Martin Waters will continue to lead the new standalone Victoria’s Secret business as CEO. Other inclusions to the board of both the companies will be allotted in due course.

The spin-off will be carried out through a pro-rata distribution of common stock to L Brands’ shareholders. The transaction is expected to be completed in August 2021, subject to customary closing conditions.  

Management expects the spin-off to help each company maximize financial flexibility and boost strategic focus. This will enable the companies to thrive better in an evolving retail landscape. Management highlighted that the company has made significant progress in achieving a turnaround in the Victoria’s Secret business, by adopting strategies such as enhancing merchandising and marketing, driving top-line growth as well as undertaking actions to reduce costs. Victoria’s Secret delivered an increase in adjusted operating income of more than 300% during the third and the fourth quarter of fiscal 2020. Backed by the prudent growth efforts, Victoria’s Secret is now well positioned to thrive as a standalone public company and continue with its global growth momentum.

Speaking of Bath & Body Works, the business continued to demonstrate growth in operating income and sales. Supported by high-speed sourcing and logistics model, Bath & Body Works has continued to adapt and evolve according to customer tastes. Presence of a loyal customer base and strong brands keeps the business well positioned for consistent growth in North America as well as globally.

Preliminary Q1 Results

Management expects to deliver strong first-quarter fiscal 2021 performance driven by continued strength in Bath & Body Works and significant improvements at Victoria’s Secret. The company will issue the quarterly earnings results on May 19, after market close.

The company reported net sales of $3,023.7 million in the first quarter ended May 1, 2021, up 82.8% from net sales of $1,654.2 million for the first quarter ended May 2, 2020. The Zacks Consensus Estimate for sales is currently pegged at $2,900 million. The company’s comparable sales (stores and direct) were up 21% year on year.

For Bath & Body Works, net sales amounted to $1,469.5 million compared with $760.6 million in the year-ago quarter. U.S. and Canada store sales amounted to $1,050.5 million. Moreover, sales in the direct channel were $349.2 million.

At Victoria’s Secret, net sales were $1,554.2 million for the first quarter compared with net sales of $893.6 million in the prior-year quarter. U.S. and Canada store sales amounted to $932.9 million. Sales in the direct channel were $520.9 million.

Moving on, L Brands expects first-quarter fiscal 2021 adjusted earnings per share of $1.25. The company had earlier guided the bottom line between 85 cents and $1. The bottom-line performance is likely to reflect gains from strong sales and margin results at both Bath & Body Works and Victoria’s Secret. Business operations are likely to have benefitted from stimulus payments and relaxed COVID-19 restrictions. The Zacks Consensus Estimate for first-quarter earnings is currently pegged at 98 cents. In the year-ago quarter, the company incurred a loss of 99 cents.

Additionally, for the first quarter, the company expects to report total operating income of approximately $570 million, including $380 million at Bath & Body Works and $245 million at Victoria’s Secret.

Shares of this Zacks Ranks #2 (Buy) company have rallied 43.1% in the past three months compared with the industry’s growth of 8.3%

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