L Brands: Stunning E-Commerce Sales At Victoria's Secret Drive Comparable Sales Growth In October

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About: L Brands, Inc. (LB)
by: Gino Aalbrecht
Summary

L Brands October comparable sales are 2%, driven by substantial growth in the direct channel.

Victoria's Secret comparable sales are 1% or 3% adjusted for the swimwear and apparel categories' exit.

Bath & Body works comparable sales are 5% for the month.

Victoria's Secret direct sales are up approximately 24% in October. Bath & Body Works direct sales are up 27%, both in October and Q3.

L Brands provides November guidance: Flat comparable sales, including -1% impact of the swimwear and apparel categories.

What are Victoria's Secret comparable sales in October?

On November 1, L Brands (LB) released the October sales report. Comparable sales turned positive for the month and more than beat investor expectations. Shares are up over 10% in post-market trading. The article explains why.

Total company comparable sales are 2% for October. The exit of the swim and apparel categories had a negative impact of about -1 percentage point. Adjusted for the exit comparable sales come in at 3%.

Victoria's Secret comparable sales are 1% in September. The exit of the swim and apparel categories had a negative impact of approximately 2 percentage points. After adjustments for the exit, comparable sales are 3% in October. The comparable sales for Bath & Body Works are 5% for the month.

L Brands - Comparable sales trend

L Brands uses two metrics to report comparable sales. The metrics are applicable to comparable sales for L Brands, Victoria's Secret and Bath & Body Works. I explain these metrics in the article: L Brands - Victoria's Secret Direct Sales Are Bleeding.

Table 1 reports both metrics for L Brands. The total company adjusted column takes into account the exit of the swim and apparel categories and reports the comparable sales, excluding these categories.

Table 1: L Brands comparable sales trend (Source: L Brands monthly sales reports)

Figure 1 reports the two-year stacked comparable sales for L Brands. Comparable sales growth on a two-year stacked basis is computed by adding comparable sales growth in the referenced period and the same period 12 months prior.

Figure 1: L Brands - Two-year stacked comparable sales (Source: L Brands monthly sales reports)

October two-year stacked comparable sales are 4%. The two-year comparable sales continue to have positive momentum and show a 1% increase compared to September comps.

Victoria's Secret comparable sales trend

Table 2 summarizes comparable sales for Victoria's Secret. The year 2017 hasn't been good so far. However, the 3% adjusted comparable sales in October pushed monthly comps in the positive territory for the first time in 2017. Furthermore, the negative effect of the swimwear and apparel exit is wearing off. The effect is still two percentage points but is expected to decline further in November.

Table 2: Victoria's Secret comparable sales trend (Source: L Brands monthly sales reports)

Figure 2 displays the two-year stacked comparable sales for Victoria's Secret. The comparable sales in October are 1% on a two-year basis and the first positive month in 2017.

Figure 2: Victoria's Secret - Two-year stacked comparable sales (Source: L Brands monthly sales reports).

Victoria's Secret - The Direct Channel

Victoria's Secret has a tough year in the Direct Channel. The direct sales in Q1 2017 were -20.4% compared to Q1 2016. The Q2 direct sales came in at -25.9% compared to Q2 2016 (Source: L Brands - Looking For Positives In The Q2 Earnings Report). One could come up with several reasons for the current decline in direct sales:

  • Victoria's Secret stopped selling online exclusive articles
  • Seasonal swimwear sales in Q1 and Q2 impacted direct sales
  • Decrease in direct mailings

One way to look at the effect of direct sales is the spread between the total company and store-only comparable sales. The difference between total company comparable sales and the store-only comparable sales is the direct channel. The spread provides an indication of the direct sales contribution to total company sales.

Table 3: Victoria's Secret direct sales spread

In October, the spread between total company sales and just store sales came in at 5%. This is huge. Store only sales were -4%, but the direct channel drove comparable sales up to 1%. Therefore, the online sales in September are in the proximity of 24%. The 24% figure can be explained with a simple example. In Q2 2017, Victoria's Secret reported around $18 in direct sales and $82 in store sales for each $100 in total sales (Source: July sales report). In October, the store only comps and total comps were -4% and 1%, respectively. One could derive the change in direct sales from the changes in store-only sales and total sales as shown in the table below.

Table 4: Direct sales growth at Victoria's Secret

The 24% number in October blows the September number of -10% out of the water. These numbers don't provide guidance on a go-forward basis. In the Q2 earnings commentary, the company reported: "Direct sales declined 26%, driven by the exit of swim and apparel. Go-forward sales in the direct channel increased 11%." The September sales report does not provide any guidance on go forward numbers.

Bath & Body Works comparable sales trend

Table 4 reports the comparable sales for Bath & Body Works. The October comparable sales are 5%. A strong result in the direct channel drives the comparable sales growth. More on this later.

Table 5: Bath & Body works comparable sales trend (Source: L Brands monthly sales reports)

Figure three reports the two-year stacked comparable sales for Bath & Body Works. The two-year stacked comparable sales for Bath & Body Works are 11% in October. A small decline versus the 13% in September.

Figure 3: Bath & Body Works - Two-year stacked comparable sales (Source: L Brands monthly sales reports).

Bath & Body Works - The direct channel

Bath & Body Works performs very well in the direct channel. Direct sales were up 16% in Q2 2017 and are up 27% in Q3 2017 (Source: October Sales Report). Bath & Body Works applies the same reporting metrics as Victoria's Secret. To determine Bath & Body Works direct sales, I apply the methodology used to determine Victoria's Secret direct sales. Table 6 reports the direct sales spread.

Table 6: Bath & Body Works direct sales spread

In September, Bath & Body Works reports total comparable sales of 5% and store only comparable sales of 2%. The 3% difference is driven by the growth in the direct channel. Bath & Body Works generates approximately $12 in direct channel sales for every $100 in total sales. These numbers can be used to determine the direct sales growth.

Table 7: Direct Sales growth at Bath & Body Works

The table shows direct sales growth for October is approximately 27%, comparable to the September numbers.

November guidance

In the October Sales Report Transcript, the company states: "We expect November total company comps to be about flat. We expect the exit of swim and apparel to negatively impact total company comps in November by about 1 point." Adjusted for the 1 percentage point exit, the November comparable range should be 2% to -1%. November guidance is somewhat below the results in October but is still a significant improvement over the rest of 2017.

Merchandise margin rate and inventory management

The company reports merchandise margin rates are down in October compared to October 2016 (See October Sales Report Transcript). Victoria's Secret margins were down driven by the quarter-end shrink results. Absent the shrink impact the merchandise margin would have been approximately flat. Bath & Body Works margins were down, driven by the business mix both on category and channel level. Furthermore, in the report, the company reports inventories per square foot are down 4% for the month versus last year. The decrease in inventories per square foot will have a positive effect on the company's cost.

Conclusion

October comparable sales came in at 2% or 3% adjusted. Victoria's Secret sales are positive for the first time in 2017, driven by outstanding direct channel sales. Two-year stacked comps are improving for both Victoria's Secret and L brands. Bath & Body Works outperforms, with continued strength in the direct channel. Merchandise margins and inventories are down. November company guidance is somewhat below October numbers, but still very strong compared previous months in 2017. L Brands shows improving comps for five sequential months. Upside remains.

Disclosure: I am/we are long LB. 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.