L Brands (NYSE:LB) has remained a bright spot in the retail industry, which is struggling with declining traffic and increasing competition. For August 2016, the company reported a 2% increase in comparable sales (compared to the same month last year) and a 3% increase in net revenues. As the company works on its restructuring plan, it is driving growth through initiatives such as combining both its in-store and direct channels and revamping its promotional approach to draw new customers.
As per our estimates, Victoria's Secret is the most valuable segment for L Brands, with its stores and direct channel accounting for more than 70% of the company's valuation. As the company restructures this segment and narrows focus on core products, it is likely to be a key revenue driver in future.
The La Senza segment is gaining traction and has recorded positive comps in the past few quarters. Currently, this segment does not form a significant part of L Brands' valuation, in our estimation. However, we believe that as the company expands this brand in the U.S. and internationally, it can become a key growth driver over the long term.
Restructuring Of Victoria's Secret Brand
Earlier this year, L Brands embarked on a restructuring plan for the Victoria's Secret segment, increasing focus on its core businesses and eliminating non-core products such as swimwear, shoes and accessories. The company also decided to reduce its promotional activities in terms of direct mail couponing and secret rewards, and focus more on brand marketing for core brands. We believe this focus on core products and the revamped promotional strategy should drive growth for the company in future. While these changes initially had a short-term negative impact on Victoria Secret's performance, more positive results of this strategy are now appearing. We expect Victoria's Secret stores to maintain their EBITDA margin at around 28% over our forecast period and gradually increase their revenue per square foot.
L Brands has reorganized Victoria Secrets into three divisions : Victoria's Secret Lingerie, PINK and Victoria's Secret Beauty. The company intends to narrow its focus and simplify its operating model through this restructuring. The beauty segment is one of the fastest-growing categories at Victoria's Secret stores. Currently, beauty represents nearly 20% of Victoria's Secret's US sales. We believe a focus on the beauty segment, along with benefits of the restructuring exercise will drive revenues in the long term.
La Senza Segment
L Brands is looking to expand its La Senza brand in the U.S. and will open the fourth store of this brand later this year in Orland Park, near Chicago. While this brand has a chain of stores in Canada, its U.S. expansion can drive revenues for the company in the long term. La Senza is aimed towards the younger, edgier and value-conscious consumers, and as the company looks to expand this brand internationally, it can become a growth driver in the long term. As per our estimates, La Senza and Henri Bendel account for less than 1% of L Brands' valuation. However, we expect a rapid increase in revenues and margins of these brands over our forecast period. Restructuring efforts and global expansion can lead to faster growth in revenues from these brands, and they can drive growth for the company over the long term.
Disclosure: No positions.