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As Victoria’s Secret Sales Fall 39% In Q2, L Brands Hopes for Early Holiday Start

Consistent with expectations disclosed in the company’s July 28 business update, net sales for L Brands were $2.3 billion for the quarter ended Aug. 1, a decrease of 20 percent compared to sales of $2.9 billion in the year-ago quarter. However, the sales numbers outperformed estimates from Refinitiv-polled analysts, who expected sales of $2.2 billion.

As of the end of the quarter, 691 of 974 Victoria’s Secret stores and 1,600 of 1,735 Bath & Body Works stores have reopened since first closing during the Covid-19 pandemic. The company is still in the process of closing 251 North American Victoria’s Secret locations before the end of the year. A total of 207 net stores have closed between Feb. 1 and Aug. 1, bringing Victoria’s Secret’s store tally in the U.S. and Canada to 884.

In a Nutshell: The earnings report comes amid the company’s recent elimination of 850 corporate staff, or 15 percent of L Brands’ total head count, as it seeks to cut $400 million in annual spending. L Brands expects to generate $175 million of savings in fiscal 2020.

L Brands is still looking to sell off the struggling Victoria’s Secret business.

Aside from its problems at home, Victoria’s Secret continues to work through losses in its international business, particularly in the U.K. and China. The U.K. branch entered “light touch” administration in June so it could continue operating its 25 stores while restructuring lease agreements and exploring a sale of the business. According to a Sky News report, U.K.-based chain Next reportedly acquired Victoria’s Secret U.K., even securing an exclusivity agreement until the end of September to finalize a deal. But L Brands hasn’t made any indication that a sale has been completed.

Given the continuing high level of uncertainty in the current environment, L Brands is not providing third quarter or full-year 2020 earnings guidance.

Overall, total inventories across both brands ended the quarter up 11 percent compared to last year and in line with expectations. Store inventories were up high-single digits on a per-selling-square-foot basis. The company believes that its inventory levels are well-positioned to fuel the business for the Fall season and meet customer demand for new products, according to a statement.

L Brands is working with suppliers to identify opportunities to reduce merchandise costs in order to increase merchandise margin rates at Victoria’s Secret. As a result of this effort already underway, Spring inventory receipts for Victoria’s Secret were down approximately 45 percent compared to last year, and Fall receipts are expected to be down approximately 50 percent year over year.

The second quarter brought two major charges related to L Brands’ activities during the pandemic that affected the company’s overall adjusted income. L Brands incurred a $117.1 million charge included in buying and occupancy expenses related to the impairment of certain Victoria’s Secret lease and store assets.

Additionally, the company took another charge of $80.8 million, included in general, administrative and store operating expenses, largely from severance payouts related to the company’s job cuts.

L Brands also saw a $36.3 million gain included in buying and occupancy expenses, related to the closure and termination of the lease of Victoria’s Secret’s unprofitable Hong Kong flagship store. And the company even received a $20.5 million income tax benefit related to recent changes in tax legislation included in the CARES Act.

The company converted its revolving credit facility to an asset-backed loan facility and issued $1.25 billion in new notes, and now expects to use a portion of the proceeds to pay the $450 million maturity due in April.

Net Sales: Net sales across L Brands companies totaled $2.3 billion for the quarter ended Aug. 1, a decrease of 20 percent compared to sales of $2.9 billion the year-ago quarter.

Total Victoria’s Secret second-quarter sales in the U.S. and Canada were $977.5 million, a decrease of 39 percent compared to $1.6 billion last year. Sales at Victoria’s Secret’s e-commerce business increased by 65 percent to $613.9 million compared to $373.1 million last year.

The lingerie brand’s second-quarter comparable store sales decreased 10 percent during the period in which stores were open, but it should be noted that stores were excluded from the comparable sales calculation if they were closed for four consecutive days or more as a result of the pandemic. Victoria’s Secret stores were closed for about 70 percent of the quarter, according to a company statement.

Sales for Victoria’s Secret’s international segment declined by 48 percent to $80 million due to the temporary store closures during the quarter.

The Bath & Body Works brand, which has buoyed L Brands on the whole as Victoria’s Secret continues to fall out of favor with shoppers, saw U.S. and Canada second-quarter sales of $1.2 billion, an increase of 13 percent compared to $1.1 billion last year. Sales within the Bath & Body Works online business, increased a massive 191 percent to $518.6 million compared to $178.4 million in the year-ago period, while comparable sales increased 87 percent. Products like hand sanitizer likely bolstered the brand’s performance.

Net Earnings: Net losses in the second quarter totaled $49.6 million, or an 18 cents per share loss, compared to net income of $37.6 million last year, or gains of 14 cents per share. Second-quarter operating income was $44.0 million, compared to $174.6 million last year.

Excluding the special charges, tax benefits and gains from closing the Hong Kong flagship, which accounted for a 42 cents per share loss, adjusted earnings per share for the second quarter were 25 cents per share compared to 24 cents for the quarter.  Adjusted second-quarter operating income was $205.7 million, an increase of 31 percent compared to $174.6 million last year, and adjusted net income was $69 million compared to $67.6 million last year.

Gross profit dropped nearly 48 percent in the quarter, sliding from $1.9 billion in the year-ago quarter to $1 billion in the recent period.

CEO’s Take: While L Brands CEO Andrew Meslow did not provide a statement in the company’s earnings release, the company released transcribed remarks ahead of its earnings call on Aug. 20. With the company seeing the majority of its sales and profits during the fourth quarter, it appears it is embarking on a rough road as it braces for the peak season.

“Given the traffic constraints imposed by social distancing protocols in stores and capacity restraints in our direct channel distribution centers, we have a very cautious outlook about our ability to manage our typical holiday volumes, which are about three times larger per week than the average week in the second quarter historically,” the statement said. “We are evaluating and testing ideas to spread our holiday volume out over a broader time period, and to pull some volume out of the fourth quarter and into the third. We also expect to return to a more typical promotional approach.”

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