L Brands (LB) Q1 Loss Wider Than Expected, Revenues Miss

L Brands, Inc. LB reported wider-than-expected loss per share for first-quarter fiscal 2020, while revenues missed the Zacks Consensus Estimate. This marked the fourth straight quarter of negative sales surprise. Results were primarily hurt by implementation of store closures across North America since mid-March in wake of the coronavirus outbreak. However, robust online demand partly cushioned the decline in the top and the bottom line.

Driven by the heightened uncertainty regarding the effects of the coronavirus pandemic, the company refrained from providing any guidance for the second quarter and fiscal 2020.

As restrictions ease, the company expects to gradually re-open stores throughout the second quarter, while implementing necessary safety and health measures, per the government guidelines. The company expects to re-open nearly all of its stores by the end of July. Further, the company is focused on boosting online sales. It is also keen on inventory management, expense control and conservative capital allocation to preserve cash and boost liquidity.

Additionally, the company is set to boost shareholder value by establishing Bath & Body Works as a pure-play public company. It is also on track to operate the Victoria’s Secret Lingerie, Victoria’s Secret Beauty and PINK businesses as a separate standalone company.

Notably, this Zacks Rank #5 (Strong Sell) stock has fallen 48.3% in the past three months, compared with the industry’s decline of 38.9%.

Detailed Quarterly Discussion

L Brands reported adjusted loss per share of 99 cents, wider than the Zacks Consensus Estimate of a loss of 71 cents. Further, the bottom line compared unfavorably with earnings of 14 cents reported in the year-ago quarter.

Net sales came in at $1,654.2 million, down 37.1% from $2,628.8 million reported in the prior-year quarter. The top line also missed the Zacks Consensus Estimate $1,820 million. The decline can be attributed to the closure of nearly all of the company’s stores in the United States and Canada since Mar 17 and earlier in international locations due to the coronavirus outbreak.

L Brands, Inc. Price, Consensus and EPS Surprise

 

L Brands, Inc. Price, Consensus and EPS Surprise

L Brands, Inc. price-consensus-eps-surprise-chart | L Brands, Inc. Quote

Comparable sales (stores and direct business) rose 4% after remaining neutral in the prior-year quarter. The increase primarily resulted from gains in the direct and Bath & Body Works businesses. Meanwhile, the aforementioned store closures and softness in Victoria’s Secret business were drags. Consolidated comparable store sales (only stores) declined 5% compared with a 3% fall in the prior-year quarter.

Victoria’s Secret: Total sales declined 45.6% to $821.5 million. Comparable sales fell 13% and comparable store sales declined 15%. Further, the segment saw a 15% decline in digital sales, mostly due to the six-day closure of the direct business. Notably, Victoria’s Secret distribution centers were closed on Mar 19 to implement additional safety measures, which reopened on Mar 25. During this time, the Victoria’s Secret online business was also non-operational. However, in April alone, when the segment’s digital business was operational, direct sales rose 30%.

Bath & Body Works: Total sales declined 18.1% to $712.7 million. However, the segment’s comparable sales (stores and direct business) improved 41% in the quarter on the back of strong sales in the direct business as well as increased sales at stores prior to closures due to the virus outbreak. Notably, sales for the Bath & Body Works direct business soared 85% to $288.9 million as the online business remained operational throughout. Meanwhile, comparable store sales (only stores) were up 20% driven by robust increase in demand for hand soaps and sanitizers prior to the closure of stores. Further, the company witnessed strong demand at the Body Care and Home Fragrance businesses during this period.

We note that L Brands’ International sales were $65.5 million in the reported quarter, down 51% year over year. The sharp decline is mainly attributed to the significant store closures across all regions. However, revenues improved slightly for Bath & Body Works international despite closure of the international franchised stores for most part of the quarter. Strong in-store sales before the store closures and robust online demand aided revenues for the franchised business.

L Brands’ adjusted gross profit declined 59% to $385.5 million during the quarter. We note that gross margin contracted 1,220 bps to 23.3% on account of buying and occupancy deleverage on sales decline. The company reported adjusted operating loss of $220.9 million against adjusted operating income of $153.3 million in the prior-year quarter.

SG&A expenses declined 22% to $606.4 million, mainly as the company adopted measures to curtail expenses, including furloughing associates from Apr 5, suspending store rents for April and May, lowering inventory receipts, extending vendor payments and more, in the wake of the coronavirus outbreak. As a percentage of net sales, however, SG&A expenses increased 700 bps to 36.7%.

Store Update

As of May 2, 2020, company-owned stores were 2,897, including 1,070 Victoria’s Secret stores, 1,737 Bath & Body Works, 21 Victoria’s Secret U.K./Ireland, five PINK U.K., 40 Victoria’s Secret Beauty and Accessories and 24 Victoria’s Secret China.

Total non-company-owned stores were 722, including 207 Victoria’s Secret Beauty & Accessories, 72 Victoria’s Secret, 12 Pink and 262 Bath & Body Works stores. Further, non company-owned stores comprised 153 and 16 Travel Retail stores of Victoria’s Secret Beauty & Accessories and Bath & Body Works, respectively.

Other Financial Details

L Brands ended the quarter with cash and cash equivalents of $957.2 million, down from the prior-year quarter’s $1,145.6 million. Long-term debt decreased to $5,034.1 million from $5,748.7 million a year ago. Shareholders’ deficit was $1,859.6 million. Management incurred capital expenditures of $55.2 million in the quarter under review.

As part of its efforts to preserve cash amid the coronavirus pandemic, the company has slashed its capital expenditure guidance for fiscal 2020 to $250 million from $550 million anticipated earlier. Further, the company has suspended quarterly dividends for the time being to preserve liquidity.

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