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L Brands Inc LB

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No-Moat L Brands Finishes 2020 Holiday Season Strong Despite Weakness at Victoria's Secret

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

No-moat L Brands reported strong sales for holiday 2020, covering the first nine weeks of its fourth quarter. Bath & Body Works remains a standout with a 17% comparable sales increase, stemming from a 5% in-store rise and a 64% e-commerce increase. Victoria’s Secret continues to struggle, as it printed a 9% comp sales decrease on a 23% in-store sales decline only partially offset by a 24% e-commerce increase. Both segments saw merchandise margin improvement owing to better promotional pricing and inventory management. As a result, we plan to increase our fourth-quarter gross margin estimate to 46% from 39%, although we expect some gains to reverse in 2021 on wage investments and higher shipping costs. We now forecast fourth-quarter EPS near the low end of company guidance of $2.70-$2.80 but materially higher than our prior $1.86 forecast. We plan to raise our fair value estimate by a single-digit clip but still view the stock as overvalued.

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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 2,600 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, which we expect to be executed in 2021.

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