L Brands Inc.: She's Beautiful... And Complicated

Bruder Capital, LLC profile picture
Bruder Capital, LLC


  • LB generates big, beautiful stable cash flows but key revenue metrics are trending lower.
  • The enterprise valuation is well below retailers in general but well above more direct comps.
  • The debt is also complicated as it runs either rich or cheap depending on the tenor.
  • Here's a review of why and how investors might best position themselves within the capital structure.

L Brands, Inc. (LB) is hugely successful marketing lingerie with Victoria's Secret models dressed up as angels, but away from the runway, investors haven't had much to cheer about lately. Over the past five years, while the S&P 500 provided a total return (including dividends) of 92.4%, LB shareholders received a 31.2% total return. And if you're thinking that performance is similar to most other retailers given all the comments about the death of traditional retail, think again. The S&P 500 Apparel Retailer sub-index (which includes both internet and store-based operators with an internet presence) actually returned 100.9% over the same period. True, that broader sector performance has recently tapered off, but LB's shares have suffered more.

This wasn't always the case, as shown in the price graph below. The graph compares LB common to both the S&P 500 and the Apparel Retailer indices. Until the second half of FY'16, LB was generating sector-beating returns at least during four of the past five years. Moreover, the Company's shares were also generating the broader market for three of those years. However, at least since the middle of last year, if LB Common Stock still has wings, it has unfortunately been attached to Icarus rather than a Victoria's Secret model:

At $12.6 billion revenue, LB remains several orders of magnitude larger than its women's apparel retail comparables. By comparison, Ascena Retail Group, Inc. (ASNA) runs $6.9 billion sales, Chico's FAS, Inc. (CHS), $2.5 billion and Cato Corp. (CATO) just under $1 billion. The Company's valuation reflects its size and better metrics. While LB's Enterprise Value to EBITDA multiple of 7.3x and P/E multiple of 14.3x for this year are 21% and 24% discounts, respectively, to the S&P 500 Apparel Retail Index, they are also 34% and 5% premiums to the average for the most directly comparable women's

This article was written by

Bruder Capital, LLC profile picture
Three decades of capital markets experience: institutional trader for Lehman Brothers, M&A banker at Merrill Lynch, research, sales and trading positions at KeyBanc, RBC Capital Markets, and BNP Paribas, private equity valuation consultant for PwC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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