Some of the most eye-catching ads on TV don’t come from
Apple. They also don’t come for Google or any other tech company. No, instead,
they come from one of the most well run retailers in the world, L Brands. The
company owns and operates Bath & Body Works, Henri Bendel, and most
importantly, Victoria’s Secret. It’s Victoria’s Secret brand that has driven
outstanding performance in L Brands, and will continue to do so in the future.
A couple weeks ago, L Brands reported another blowout
quarter and full year of earnings. The company saw growth in sales, margins and
tighter inventory control across all business, with Q4 EPS growing 15% and net
sales growing 7%. Gross margins increased 210 basis points to 45.1%, driven by
lower operating costs for all brands. For the year, the company increased
earnings by 15%, sales by 6%, and gross margins up almost 1%. The company has
also gotten better at managing inventory, with Q4 inventory per square foot at
cost down 10% YoY, and they expect Q1 inventory to be in the mid-single-digits.
FY14 sales at Victoria’s Secret grew 5% to $7.2B, driven by
their bra business in lingerie, sport and PINK brand. As for Bath & Body
Works, FY14 sales grew by 7% YoY as they outperformed during the holiday
seasons on the backs of their Signature Collection, soap and sanitizer business
and home fragrance assortments. Management expects same-store sales at
Victoria’s Secret to be in the mid-single digits, as they look to expand store
square footage by about 5% with 26 new locations. Bath & Body Works store
square footage is expected to increase 3% with 24 net new locations and 90
remodels. While most of L Brands revenue comes from the US, their international
business has been outstanding. In 2014, revenues grew 51% YoY and operating
income more than doubled to $78M. They continue to look to expand by planning
on opening 4 more locations in the UK and 8-10 stores in the Middle East.
The company’s management is second-to-none. While most
retailers were dealing with problems at the West Coast ports over the last few
months, L Brands chose several years ago, to bypass the ports and move their
inventory by air, capitalizing on the rapidly changing fashion trends. That
move helped them post very strong February same-store sales, while most other
companies saw sales decline, blaming bad weather and the consumer not spending
their savings from cheaper oil. L Brands announced same-store sales grew 6%,
easily beating the street expectation of 4.8% growth. This coming after a
strong January of 7% sales growth, blowing out the 2% that analysts were
expecting.
Although the stock is trading just a couple dollars off
all-time highs, I think it has plenty of room to run. The company is investing
heavily in its mobile and online platform, which will increase total sales.
Additionally, while the company does have international exposure, its main
business is in the US, so it will benefit from a stronger dollar. The company
has a strong brand and loyal following, and should reap great rewards from a
strong consumer.
Closing on Friday at $90.09, L Brands is still relatively
cheap, trading at just 21x future earnings, in-line with the industry average.
The company has also been buying back stock and sports a 2.20% dividend, better
than retailers, Gap, Costco, Macys and Hanesbrands.
Although L Brands is near
all-time highs, I would recommend buying some of your position now and buying more
on a pullback to between $85-$87.
My current positions: Long
Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL),
Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC),
General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner
(TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI),
Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye
(MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals
(URI), Regeneron (REGN), and Restoration Hardware (RH).
Jeff Lewison
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