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L Brands Earnings Smash Projections, Still Seeks Victoria’s Secret Split

L Brands had a bounce-back third quarter from its subpar second-quarter showing, reporting a 14.1 percent increase in net sales of $3.1 billion, well above the $2.7 billion growth expectation of analysts polled by FactSet. Third-quarter net income of $330.6 million, or $1.17 a share, smashed projections of 12 cents a share and represent a complete reversal from a net loss of $252 million in the last-year period.

In a Nutshell: In the retailer’s third quarter earnings call, Stuart Burgdoerfer, executive vice president and chief financial officer at L Brands, confirmed that the company’s board still feels the appropriate valuation of the Bath & Body Works brand will be enhanced by am uncoupling from Victoria’s Secret.

Burgdoerfer said after L Brands gets good visibility into the full fourth-quarter results, the company will work with its advisors, JP Morgan and Goldman Sachs, to “begin a process in earnest to pursue the options for the separation of the two companies.”

After L Brands’ sale of a 55 percent stake in Victoria’s Secret to Sycamore Partners fell through, the company has looked to offload the lingerie label in other venues. In the quarter, L Brands formed a joint venture with Next PLC to co-own its ailing Victoria’s Secret U.K. division. Next will be the majority owner of Victoria’s Secret U.K., holding a 51 percent stake, with L Brands owning 49 percent. The venture operates the 26 VS stores in the U.K. and Ireland, while the online operation, currently run by L Brands, will be folded into the JV next spring.

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Andrew Meslow, CEO of L Brands and Bath & Body Works, said in the call the company is dealing with challenges in the holiday season, particularly in generating store channel sales growth.

“Our typical holiday volumes are about three times larger per week than the average week in the third quarter, historically,” Meslow said. “The current capacity limitations that range from 25 to 50 percent of normal capacity will not allow us to see the same number of customers on peak days that we have in prior years.”

Additional constraints in direct channel fulfillment and shipping capabilities have made the company spread out its promotions, which traditionally were deeper discounts held on single days, over a longer period.

The promotional shift has been a big benefit for L Brands, helping both Bath & Body Works and Victoria’s Secret increase margins across the board, take pressure off its peak days and increase price points on promotions, while enabling the companies to put holiday product on the floor by the end of the quarter.

Meslow said that in the case of Bath & Body Works, the company dramatically increased its fulfillment capacity, by more than two-and-a-half times year-over-year in the third quarter. On the Victoria’s Secret side, Burgdoerfer said there has been “some net increase” in unit capacity in its fulfillment centers, “but not as great as we would have expected.”

The company expects continued increased cost pressures in the fourth quarter resulting from higher store selling costs, safety equipment, supply costs, increased fulfillment expenses and higher parcel carrier surcharges.

As a result of the continued uncertainty created by the Covid-19 pandemic, L Brands still is not providing financial guidance.

Overall, the number of Bath & Body Works customers that spend both online and offline actually increased 70 percent year over year in the quarter, with Meslow noting that these shoppers spend approximately three times more than those who spend in a single channel.

Home fragrance and body care categories grew by more than 30 percent in the third quarter, while soap and sanitizer have remained significant drivers of the Bath & Body Works business due to the pandemic, representing 21 percent of all sales.

Net sales: L Brands reported net sales of $3.1 billion for the third quarter, or a 14.1 percent jump compared to net sales of $2.7 billion in the prior year quarter. Bath & Body Works, as has been the case in recent years, was the chief growth driver of L Brands with net sales jumping 54.9 percent to $1.7 billion from $1.1 billion in the third quarter of 2019. Victoria’s Secret’s net sales saw a decline of 14.2 percent to $1.35 billion, from $1.6 billon.

Comparable sales increased 28 percent for the quarter across brands, with Bath & Body Works doing the heavy lifting with a 56 percent jump compared to a mere 4 percent for Victoria’s Secret. When only taking stores into account, comparable sales growth tallied 38 percent for Bath & Body Works, while Victoria’s Secret lost 10 percent.

E-commerce sales for Bath & Body Works got a big boost in the third quarter, increasing 132.1 percent to $446.5 million, while online sales at Victoria’s Secret going up 41.9 percent to $470 million.

Net earnings: L Brands reported third-quarter net income of $330.6 million compared to a net loss of $252 million last year. Earnings per share of $1.17 for the quarter, compared to a loss per share of 91 cents for the quarter. Third quarter operating income was $580.6 million compared to an operating loss of $151.2 million last year.

Gross profit for L Brands nearly doubled at an 83.6 percent increase from $740.5 million in the third quarter of 2019 to $1.36 billion.

CEO’s Take: In the call, both Meslow and Burgdoerfer talked about “chasing inventory” as a means to play conservatively for both brands throughout the year, particularly stemming from cancelled receipts at the onset of the pandemic. But the strategy has worked so far in the third quarter. With that said, Meslow spoke highly of L Brands’ supply chain’s ability to weather the pandemic, and when combining that with the earlier, but shallower, holiday promotions, he said, “we feel good about our overall inventory position.”

“We were able to cut back and not do a fall ‘end of Q3’ sale’ this year based on that sell through that obviously has allowed us to be very clean from an inventory standpoint as we come into the fourth quarter,” Meslow said. “It also allowed us to get an early read on some of our holiday goods at the end of the third quarter…We’re pleased with the early product acceptance that we’re seeing to those holiday assortments, and we believe our overall inventory levels are positioned appropriately.”