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Fashion retailer L Brands Inc. still plans to spin off Bath & Body Works, and as part of the preparation for its flagship Victoria’s Secret chain to be a standalone business, the company plans to close about 250 stores across the U.S. and Canada.
Victoria’s Secret had a total of 1,091 stores in North America as of Feb. 1, 2020, including the Pink brand.
L Brands LB, +18.24% shares soared 17% after the news.
North American stores closed on March 17 due to the coronavirus epidemic and Victoria’s Secret distribution centers were closed for six days starting March 19. The stores that aren’t closing are expected to be open by the end of July, said Stuart Burgdoerfer, chief financial officer for L Brands and interim Victoria’s Secret chief executive, said on the early Thursday earnings call.
“We think there will be more store rationalization over the next several years as well,” Burgdoerfer said, according to a FactSet transcript.
“[W]e see a pathway for a business that’s, say in the neighborhood of at $6 billion-ish business or a $5.5 billion business; one that mixes much more significantly to digital and one obviously, that’s substantially more profitable than the current or recent state of the business.”
Victoria’s Secret North America sales for the full-year ending Feb. 1, 2020 were $6.805 billion, down 8% from the previous year. Same-store sales fell 7%.
Victoria’s Secret sales for the first quarter were nearly halved, totaling $821.5 million compared with $1.51 billion the year before.
Bath & Body Works had 1,739 stores in the region, and sales for the first quarter totaled $712.7 million down from $870.7 million the year before. Bath & Body Works sales in hand sanitizers and hand soaps were strong, the company said.
For the first quarter, L Brands reported wider-than-expected quarterly losses and sales that missed expectations.
See:J.C. Penney will have to close at least 25% of stores, Cowen analysts say
In early May, L Brands announced that the $525 million deal to sell a 55% stake in Victoria’s Secret to Sycamore Partners had been called off. Still, L Brands said it was committed to making the Bath & Body Works beauty chain a standalone company.
In addition to store closures, Victoria’s Secret is reorganizing and decentralizing and executives are analyzing the international financials.
MKM Partners says the company faces an array of challenges as it tries to separate the businesses, one of which is the fact that there has been no talk of a new strategy for Victoria’s Secret merchandise, which has fallen out of favor.
“We’ll be curious to hear about the profit profile of closing stores knowing that historically some of Victoria’s Secret’s best stores were in lower tier malls,” wrote Roxanne Meyer, managing director at MKM Partners.
MKM rates L Brands stock neutral with an $11 fair value estimate.
Cowen analysts led by Oliver Chen also brought up the issue of which stores would be shuttered.
“We are encouraged that Victoria’s Secret is using the environment to reassess its store strategy, as we have held the view that a smaller Victoria’s Secret footprint is a necessary step toward stabilizing the brand,” Cowen said. “However, before COVID-19, 99% of stores were profitable on an after-tax basis, likely making closure decisions difficult until now.”
Cowen rates L Brands stock market perform with a $17 price target.
“Although one of the largest brands in the history of time, Victoria’s Secret essentially loses money and we believe a smaller Victoria’s Secret could be a healthier Victoria’s Secret,” wrote BMO Capital Markets analysts led by Simeon Siegel.
“When discussing the go-forward approach to Victoria’s Secret, management referenced a profit improvement plan, NOT a revenue improvement plan, an approach that we believe could drive meaningful value.”
BMO recently upgraded L Brands shares to outperform with a $17 price target.
L Brands stock has sunk 20.3% for the year to date while the S&P 500 index SPX, -0.77% is down 8.7% for the period.
