Is Victoria’s Secret A Great Stock to Buy?

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By Jacob Maslow

Victorias Secret
Victoria’s Secret store at Guglielmo Marconi International Airport;

L Brands (NYSE: LB) is the parent company of the famous lingerie powerhouse Victoria’s Secret. The company has built a reputation for comfortable, durable and high-quality products that consumers are willing to pay a premium for over the competition.

Victoria’s Secret has achieved success through their high-quality lingerie, which has turned the company into a globally-recognized brand.

When the company announced that it would be repurchasing shares in 2015, stock prices soared on the news as profits helped buy back shares. The company further announced a 47% dividend increase on the year, with forecasts of 7% revenue growth in 2015.

L Brands’ stock benefitted from strong performance from Victoria’s Secret, which pushed the company’s stock to trade at 28 times its earnings, a red flag for most non-tech stocks.

The company’s latest earnings report shows a struggling Victoria’s Secret brand that dragged down L Brands’ profits to start the year. The lingerie and beauty division also struggled in international sales.

Victoria’s Secret had an adjusted operating income decline of 7% year-over-year, posting -$20.4 million in income. Internationally, Victoria’s Secret is tied to the company’s Bath & Body Work International brand, which posted a 39% decline in year-over-year growth and $-8.4 million in adjusted operating income.

The company’s Bath & Body Works and PINK brands all performed well in the first quarter of 2016.

L Brands as a whole had adjusted earnings per share drop 3% to $0.59, with the company lowering its earnings guidance from $3.90 – $4.10 down to $3.60 – $3.80. A drop in guidance has directly impacted the company’s stock price.

Victoria’s Secret will now be separated into 3 different categories, each with their own executives that will report to L Brands’ CEO. The companies will include: Victoria’s Secret Lingerie, Victoria’s Secret Beauty, and PINK.

In an effort to streamline operations, the company further decided to stop selling shoes, apparel, accessories and swimwear through the Victoria’s Secret brand. These items were sold through digital channels and accounted for $525 million in sales in 2015.  The company plans to sell off all remaining inventory in these respective categories by the end of the year.

Victoria’s Secret is still the major revenue driver for L Brands. The company had $1.38 billion in sales in Q1 2016, an increase from $1.34 billion in Q1 2015. Direct sales at Victoria’s Secret also increased from $338.3 million in Q1 2015 to $359.7 million in Q1 2016.

Costs of goods sold rose as well as administrative expenses and interest expenses. Gross profit fell year-over-year, with net income on the quarter down from $250 million in 2015 to $152 million in 2016.

In 10 years, L Brands stock has risen 179%, with a 100% rise in the last 5 years. Two-year stock growth is around 18% – 20%. L Brands stock has slumped over the last 6 months, falling 28% to date after the company’s earnings report.

May sales figures were positive for L Brands as a whole, but the company’s transformation of the Victoria’s Secrets brand will decide its fate. Trading at 30% lower on the year, L Brands is a stock to consider for long-term growth. If the company can turn around its Victoria’s Secrets income, expect the company’s stock to soar.

The company’s other segments are performing strongly.

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