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Victoria’s Secret Drags Down L Brands’ Credit Outlook to Negative

Credit ratings firm Moody’s Investors Services isn’t too keen on Victoria’s Secret parent company, L Brands Inc., these days.

The ratings firm on Tuesday changed its outlook from “Stable” to “Negative.”

“L Brand’s negative outlook reflects the deteriorating operating margins and negative comparable store sales at Victoria’s Secret for the past ten quarters,” Christina Boni, credit analyst and vice president, said. L Brands’ financial policies, she added, have “shifted away from favoring shareholders with the cutting of its common dividend by 50 percent, a savings of approximately $325 million a year.”

While Boni noted that the company still has good liquidity and moderate leverage with debt to EBITDA of 3.6 times as of Feb. 6, it still has to address some maturities that are coming due. The first is $338 million of notes due May 2020. There also about $2 billion of debt that’ll  mature before April 2022.

More specifically, Boni said the negative outlook reflects “our concern that Victoria’s Secret division, sales and operating income trends remain weak.” Any significant deceleration at Bath & Body Works, which has continued to outperform, or accelerated pressure at Victoria’s Secret would be viewed negatively. The analyst said the negative outlook also reflects the need to prioritize debt reduction to reflect the current earnings performance.

In February, L Brands posted mixed fourth-quarter results. Net income fell 18.7 percent to $540.1 million, or $1.94 a diluted share, on net sales that was essentially flat at $4.85 billion for the quarter ended Feb. 2. Wall Street had expected diluted earnings per share of $2.07 on sales of $4.88 billion.