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L Brands: Giving Away The Store

Mar. 02, 2020 10:11 AM ETBath & Body Works, Inc. (BBWI)13 Comments


  • L Brands is selling a 55% stake in Victoria's Secret to Sycamore Partners in a deal valuing the business at $1.1 billion.
  • This sale price is less than the business' annual operating profit just a few years ago and reflects a stunning lack of confidence in Victoria's Secret's turnaround potential.
  • The Victoria's Secret deal will leave Bath & Body Works as a standalone business with a high growth rate and incredible profit margin, but also a heavy debt load.
  • The stunning collapse of Victoria's Secret's profitability is a warning sign of what could happen to Bath & Body Works sometime in the future.
  • Avoid L Brands stock.

On February 20, L Brands (LB) announced that it had reached a deal to sell a majority stake in its once-mighty Victoria's Secret business to retail-focused private equity firm Sycamore Partners. Victoria's Secret, including its PINK sister brand, generated $7.5 billion of revenue last year: 58% of the total for L Brands. However, for the past couple of years, Bath & Body Works has been bringing in the vast majority of L Brands' profit.

The potential deal had been rumored for weeks. However, the price was shocking. Sycamore is buying a 55% stake in Victoria's Secret at a valuation of just $1.1 billion. After purchase adjustments, it will pay about $525 million. As recently as fiscal 2016, Victoria's Secret was producing more than $1.1 billion of operating income annually.

Most investors had expected a significantly higher purchase price. In early February, Seeking Alpha contributor Robbe Delaet estimated $2 billion as a bear-case valuation for Victoria's Secret.

Given Victoria's Secret's well-chronicled problems, it's not surprising that potential buyers were only interested at fire-sale prices. However, the company's decision to sell at this fire-sale price is more troubling. Investors would be wise to avoid L Brands stock, which now represents a risky, heavily-leveraged bet on Bath & Body Works.

Dumping Victoria's Secret

Victoria's Secret has been in an accelerating downward spiral for several years. In fiscal 2015, the Victoria's Secret segment (consisting of the Victoria's Secret and PINK brands in North America) produced $7.67 billion of sales and an incredible $1.39 billion of operating income, putting its operating margin at 18.1%. However, sales growth slowed in fiscal 2016 and then went into reverse a year later, while operating margin has been plunging since 2016.

The entrance to a Victoria(Image source: Victoria's Secret)

In the recently-ended 2019 fiscal year, comparable sales fell 9% for the Victoria's Secret segment, following a

This article was written by

Adam Levine-Weinberg is a value investor who has been researching and writing about stocks for Seeking Alpha and The Motley Fool since 2011. He graduated from Swarthmore College in 2007, received an M.A. in Political Science from the University of Chicago in 2009, and received his CFA charter in 2017. He is always on the hunt for irrationally beaten-down stocks, particularly in the aerospace, retail, real estate, and auto sectors.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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