Bankruptcy Watch: Is L Brands in Danger?

The pandemic has disrupted many retail businesses. But strong ones were able to ride it out and are mostly back to growth. Companies that were struggling beforehand, however, have been filing for Chapter 11 bankruptcy protection at an alarming rate. Is L Brands (NYSE:LB) next in line?

One outdated brand

L Brands operates under three brand names: Victoria’s Secret intimates, its sister brand Pink, and Bath & Body Works body care and home products. The company has started and sold many other brands over the years such as The Limited and Express. 

Victoria’s Secret was once the top retailers in its field, and at its height in 2016, it brought in over $7 billion.But already in 2017 sales began to decline as women weren’t relating to the company’s branding, featuring noninclusive body types. Brands like American Eagle Outfitters‘ Aerie, which emphasizes body positivity, took over, and Aerie sees more than 30% growth in a typical quarter, including during the pandemic.

Exterior of a Victoria's Secret store

Image source: L Brands.

The company posted a $0.70 loss per share in the fourth quarter of 2019, as compared to $1.94 earnings per share the year before. On the heels of that report, L Brands announced a sale of 55% of Victoria’s Secret and Pink to Sycamore Partners, a firm known for purchasing troubled brands such as Talbot’s and Jones New York. But after COVID-19 started, Sycamore tried to back out of the agreement. L Brands, in a precipitous cash position, retooled its credit line, cut down capital expenditures, suspended rent payments, suspended dividend payments, and took other actions to save money. Finally, it gave up on Sycamore due to the cost involved and decided instead to break the company into two parts to give each one the focus it needs.

In the meantime, L Brands is planning to close at least 250 Victoria’s Secret stores and cut office personnel. Victoria’s Secret sales comps, a metric that measures sales from stores that were open during the period and e-commerce, actually increased 28% in the 2020 second quarter ended Aug. 1. Total sales decreased 39%, but the total picture was encouraging.

One popular brand

In the midst of all of this, Bath & Body Works has been a resounding success. The brand, which sells soaps, lotions, candles, and the like, generally scores growth in mid- to high single digits and has been the saving grace of the company. During the second quarter, the same comps metric surged 123% for Bath & Body Works. Total sales increased 13%, fueled by e-commerce.The brand has greatly benefited from trends toward cleanliness and sanitizers during the pandemic.

Interior of a Bath & Body Works store

Image source: L Brands.

Total company loss per share for the second quarter ended Aug. 1 was $0.18, but the adjusted number, which excludes pre-tax charges as well as certain gains, was $0.25. L Brands also showed improved margins.

Separating the brands might be good for shareholders, who would benefit from Bath & Body Works’ performance.

A plan to separate

The company operates over 1,100 Victoria’s Secret stores worldwide, mostly in the U.S. and Canada. There are more than 1,700 Bath & Body Works stores, mostly in the U.S. Together, the brands brought in over $2 billion in the second quarter, and the decrease from the year-ago period was much better than other apparel brands over a similar time frame.

After the Sycamore deal fell through, founder and longtime CEO Leslie Wexner stepped down, and Andrew Meslow took over the top spot. Management is working on stabilizing Victoria’s Secret to either sell it, or detach it into a separate company.

L Brands stock, which lost about 30% of its value in 2019, is now up 80% year to date, and some analysts think there’s still a big upside. It’s trading at only 15 times forward one-year earnings. So far, the company has taken the right measures to stay liquid and get back on track, and the immediate danger of filing for bankruptcy seems to have passed. But I would still pass on L Brands stock until things get better.

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