L Brands: Why Shares Are Down 72% From All-Time Highs

Aug. 30, 2018 7:10 AM ETBath & Body Works, Inc. (BBWI)60 Comments


  • L Brands has $4.7 billion of net debt and annual interest expense of about $400 million. Some L Brands bulls have glossed over this fact.
  • Victoria's Secret operating margins have fallen off a cliff over the past three fiscal years and have really had a big leg down during the first half of 2018.
  • Despite the strength of Bath and Body Works, LB's dividend looks unsustainable given the debt load and deteriorating results at Victoria's Secret.
  • Members of our private investing community, Market Adventures, get our best ideas and insights. Get started today >>

As an investor that spends most of my time analyzing retail and consumer discretionary stocks, and with shares trading at a new multi-year low after the company cut FY 2018 guidance, it was time for me to take another look at L Brands (LB). That said, and for context, I have never owned shares of L Brands because qualitatively, I have always thought Victoria's Secret business model and go to market strategy was flawed (selling overpriced women's intimate apparel items endorsed by super models).

However, with shares of L Brands down roughly 72% from its Q4 2015 all time highs, it was time for a fresh look at the company. Moreover, I have been intrigued by a few recent patch of bullish Seeking Alpha articles penned by authors that have gone as far as to claim the bottom is in for L Brands at $29 or $30 per share. These series of events led me to kick the tires another time at L Brands.

Let's start with the numbers.

If we look at the full year figures for FY 2015-FY 2017, we notice that Victoria's Secret operating margins have declined from 18.1% to 12.6% and FY 2017 comps were really bad at -8%. Bath & Body Works is growing nicely and is now generating more operating income than Victoria's Secret.

Source: My charts using data from L Brands' annual reports

So the real concern and the big reason for the latest leg down in LB's stock is driven by operating results have really deteriorated during the first half of 2018. L Brands hasn't filed its Q2 2018 10-Q, so I don't have the specific operating income and margins for Victoria's Secret, but we do have the aggregate Q2 numbers and operating income is down 24% YoY for the quarter. Also, notice that in Q1 2018, YoY, Victoria's Secret

Market Adventures

As a full time investor, I look for new ideas for my portfolio every day and I always eat my own cooking. Despite having 50% of the portfolio in cash, throughout most the year, my Tactical Value Portfolio is up 13.1% YTD, through August 24th. Outpeforming the S&P 500 by 470 bps. Enclosed below is the Fidelity monthly performance so you can see first hand my results (the August data isn't available yet as the month has closed).

This article was written by

Idea generation, value investing, small caps and under the radar stocks.
A career wanderer and journeyman, with a passion for deep value and contrarian investing. I spent five years on the buy side in investment grade bonds on a team that managed $50 billion of assets, 3.5 years as an energy credit analyst for an energy company, and had multiple stints in corporate finance, most recently as a strategic financial analyst. I have an undergraduate degree in Finance (UMass Amherst) and earned an MBA (Babson College).

I actively invest my own capital and for a few family members.

Favorite quotes:

“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: Your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great and wonderful world. Dormant forces, faculties and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.” (Author - Patanjali)

“Tentative efforts lead to tentative outcomes. Therefore, give yourself fully to your endeavors. Decide to construct your character through excellent actions and determine to pay the price of a worthy goal. The trials you encounter will introduce you to your strengths. Remain steadfast...and one day you will build something that endures: something worthy of your potential.” (Author - Epictetus)

"Hope sees the invisible, feels the intangible, and achieves the impossible." (Author - Unknown)

"When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, 'I used everything you gave me." (Author - Erma Bombeck)

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.

Recommended For You

Comments (60)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.