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L Brands Inc LB

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Operating Improvement Across Segments Signals Executional Progress at L Brands; Shares Fairly Valued

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

No-moat L Brands fared better than we expected during the coronavirus-battered second quarter, bolstered by demand in the soap and sanitizer business. Bath & Body Works, or BBW, posted another stellar quarter, with comps rising 87% (at open locations), and direct sales rising 191%, leading to a segment sales rise of 13%, to $1.2 billion. Victoria’s Secret, or VS, again struggled, with sales tumbling 39%, to $978 million, as 65% growth at the direct business wasn't enough to offset downside from the store comp decline of 10%. But, both VS and BBW saw sequential profit improvement versus the first quarter as stores reopened, with both segments delivering “significantly” improved merchandise margin performance. This led to sequential improvement in segment operating margins, with BBW posting a 28% operating margin (closer to a typical volume-driven fourth-quarter result) and VS reporting a negative 4% metric (better than the negative 25% posted in the first quarter).

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Company Profile

Business Description

L Brands is a women's intimate, personal-care, and beauty retailer operating under the Victoria's Secret, Pink, and Bath & Body Works brands. The company generates the majority of its business in North America, with about 5% of sales coming from international markets in fiscal 2019. Distribution channels include more than 2,700 stores and online, which represented about 20% of total sales in 2019. The company still plans to break Bath & Body Works into a stand-alone business, but the timing and process of such a transaction has yet to be offered.

Contact
Three Limited Parkway
Columbus, OH, 43230
T +1 614 415-7000
Sector Consumer Cyclical
Industry Apparel Retail
Most Recent Earnings Jul 31, 2020
Fiscal Year End Feb 1, 2021
Stock Type Distressed
Employees 94,400

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