L Brands Looks Promising, But Margin For Error Is Fairly Small

Summary

• L Brands has fallen by more than 80% since its peak in 2015.
• I have been following the company for several years and feel it is a good time to start a position.
• L Brands had its fair share of turmoil, including 50% dividend cut, tariffs, Victoria's Secret dropping swimwear, CEO's name making headlines as part of the Epstein scandal, etc.
• Bath & Body Works has been the bright spot with strong sales growth. I believe both Victoria's Secret and PINK have potential for a major turnaround.
• What I don't really like is the debt load (mid $5bn long-term debt versus $1bn+ in cash), whereas companies like Abercrombie are effectively debt free in terms of net long term debt. That said, I believe the debt is manageable as annual cash from operations is consistently well above $1bn.

L Brands (LB), founded in 1963, owns Victoria’s Secret, PINK and Bath & Body Works. The Company operates nearly 3,000 company-owned specialty stores in the US, UK, Ireland, Canada and Greater China. I believe that all their brands, including Victoria’s Secret which is currently struggling, have tremendous long term potential, with significant growth opportunities in North America and internationally.

The share price has fallen by more than 80% since its peak in 2015, from $95+ to below $18 (at the time of writing). To be fair, LB is not the only struggling retailer, but I believe the drop has gone too far.

Source: Seeking Alpha

I am not claiming that we have found rock bottom, but I believe the current share price is factoring in a lot of negativity and fear.

Decisive Actions

The Company has taken actions to turn the ship around. Some include:

• closing Henri Bendel and selling La Senza - eliminating ~$74M in annual operating losses
• reducing the dividend by 50% to free up $325M per year in cash flow for debt reduction, etc
• strategically closing, selectively opening and remodeling stores
• appointing Amy Hauk to lead PINK and hiring John Mehas to run Victoria's Secret Lingerie
• Continuing to invest in online/Direct business
• Continuing to refresh the Board of Directors

Promising Brands

It is fair to say that a turnaround in Victoria's Secret will be a major driver in cash flow growth. I believe in the long term potential of Victoria's Secret, which has lost its way in recent years. For instance, the Victoria's Secret brand is leading in social media (~65M Instagram followers, ~29M Facebook fans, ~11 million Twitter followers), has more than 400M store visits per year, and ~$1bn website visits annually, and ~$4bn in global Lingerie retail sales.

Source: 2019 Investor Presentation, slide 4

Analyst’s 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.