L Brands Looks to Brighter Future Amid Sales Declines

The Victoria’s Secret operator was hit by dismal sales early in the year and it’s seeing some fallout after pulling swim and apparel, but it's keeping positive on growth potential.

With sales and profits down, L Brands is focusing on “future growth.”

Executive vice president and chief financial officer Stuart Burgdoerfer said during a call with Wall Street analysts that February, when comparable-store sales at Victoria’s Secret fell 20 percent, was “particularly challenging” for the company. But he pointed to the positive momentum seen in March and April before recommitting to L Brands’ plan for 10 percent growth in operating income for the year.

The company on Wednesday reported first-quarter net income of $94.1 million, which compared with profits of $152.3 million a year ago. Consolidated sales declined 7 percent to $2.4 billion as comparable-store sales dropped 9 percent.

In order to succeed in its plan for 10 percent income growth, Burgdoerfer said L Brands “will continue to focus on the things we can control and manage inventory, expenses and capital spending with financial discipline.”

While Burgdoerfer admitted that last year’s decision to “streamline” the Victoria’s Secret business, namely by exiting swimwear and apparel, “will continue to put pressure on results in 2017,” he said those moves are “providing the platform for future growth.”

Commenting on the quarter’s challenges, Bath & Body Works chief executive officer Nicholas Coe said the L Brands ability to “get back into positive territory” after February, despite continuing sales declines, “really proves the agility that we have.”

As for the 8 percent drop in earnings, which fell to 33 cents for the quarter compared with 52 cents a year earlier, Coe said that was mostly due to increased occupancy costs related to further investment in stores.

“[The first quarter] has been one of the most aggressive testing periods for us, it’s really given us insights into how we think we ought to manage the business, how we think we ought to manage the brand as we continue to move…forward,” Coe said during the call. “We feel good about the direction of our product assortments.”

L Brands’ president of international, Martin Waters, hedged less when discussing business outside of the U.S., saying “there is a continuation of some challenges of 2016 in the first quarter” and that operations in the Middle East and Turkey are generally “difficult.”

Bath & Body Works “did very well” in the U.K., however, and Waters said “we continue to be bullish about growth opportunities in China and around the world.”

L Brands also raised its full-year earnings outlook to a high of $3.40 from $3.35 despite expectations of comp sales showing an overall decline in the low-single digits.

However, excluding the continued negative impact of the company’s decision to pull swimwear and apparel from Victoria’s Secret and step away from its catalogue business, management noted that go-forward business categories should see flat to slightly positive sales trends.

Wall Street took this, as well as the increased earnings outlook, as a good sign, and sent L Brands’ shares up 5 percent during the morning to $50.50.

Wells Fargo senior analyst Ike Boruchow noted the improvement in L Brands sales throughout the quarter and said it “should give investors some confidence in current trends.”

“All in, this is a fairly bright outlook given the pressures the business has seen over the past several months, and if achieved, could signal a turnaround for the company,” Boruchow added.

Similarly, Baird analyst Mark Altschwager said he’s “encouraged” by the guidance for core operations during the second quarter, but admitted “many pieces still need to come together amid a volatile and increasingly competitive backdrop.”

“We remain on the sidelines today, but continue to warm to L Brands on its back-half recovery potential,” Altschwager added.

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