L Brands Deep Dive
I recently attended L Brands half-day investor meeting, where management presented its long-term strategy. While the absolute priority remains growing the North American business, in fact doubling it, L Brands hopes to sustain significant international growth. Finally, Les Wexner who has a place in the halls of retailing as one of the best specialty retail operators, has succumbed to the lure of international markets.
What positions L Brand apart from its competitive specialty apparel retail set is that it’s not in the apparel business and it’s not in the fashion business. L Brands competes in lingerie and beauty, two product categories that are staples (non-discretionary relatively low price points; and high emotional content (based on fabulous storytelling) for Victoria’s Secret (“VS”), Pink, La Senza and Bath & Body Works.
To quote Les Wexner’s opening comment “I think our year will be good, perhaps very good, unless Washington completely mucks everything up.” Unfortunately, as each day passes the likelihood of a muck-up is more and more real. That said, Les and his team control the controllables with a tight rein on all points of brand interaction with the consumer and employs a partnership/franchise model with a small number of world-class partners to expand beyond North America. This translates into L Brands retaining control or “owning” assortment, pricing, promotions, store design and real estate approval, while franchise partners make the capital investments, and supply the local real estate and retail selling organization skill sets.
Test, Read, React & Chase (Only When You’re Sure You’ve Got It Right!)
Similar to its practice in the US, internationally L Brands tests, reads, reacts and chases business (if only Ron Johnson heard this mantra). The focus is on the consumer and her experience, thus the real estate, store environment and selling talent are paramount. Sounds just like the ABC manual of successful (and basic) retailing.
I have to say it was refreshing to hear a retail legend talk about store experience, creating dreams, customer service, and product. Nary a word about omnichannel, big data, or ecommerce, despite the fact that L Brands has a vibrant direct-to-consumer business with its VS Direct of nearly $1.6 billion. This isn’t to say that L Brands isn’t technology savvy, just to underline its focus on what really matters to consumers and what is the lynchpin to brand building, the in-store experience.
On Veteran’s Day, New York retailers capitalized on the draw of the midday 5th Avenue parade with a bevy of promotions to jumpstart holiday shopping. I dropped into Lord & Taylor, Macy’s,JCPenney, Gap and the VS flagship late in the afternoon, and all the shops were heavily trafficked. But Victoria’s Secret had THE BUZZ. The music, the fragrance and the hustle-and-bustle of shoppers pursuing their dreams. The energy was palpable and shoppers wanted to be a part of this excitement.
Analysts have long urged Les to capitalize on the phenomenal global demand of Victoria’s Secret to little avail. Perhaps he was just being coy and carefully modulating the supply-and-demand equation to amp up demand with scarce supply. Maybe he’s just a control freak; probably both. The good news is now there is a real plan that’s organic in the test, read, react and chase mode. In 2012, L Brands opened two VS stores in London, a flagship on New Bond Street and at the Westfield Mall (home to Christian Dior and Louis Vuitton as well as Abercrombie & Fitch, H&M, Coach, Juicy Couture and Van’s). No doubt the very strong openings played into Les’s expansive plan too.
Doubling NA Sales
L Brands has articulated a path to doubling its $10 billion NA sales over the next five years that consists of:
New square footage for Victoria’s Secret and Pink.
A market intensification strategy they’ve employed since 2009 that addresses store talent, inventory and real estate (those ABC’s of retail) which produced a 70% lift in trailing 12-month sales in a recent 30-store Chicago test.
New Canadian store openings.
Last year, Victoria’s Secret’s sales-per-square-foot in its 1017 US stores were $817, while the 36 freestanding Pink stores were generating about $1300 in sale per square foot. The full Pink assortment isn’t available in 725 VS stores and the full lingerie assortment isn’t in 875 stores, suggesting ample growth opportunities from existing core categories. New adjacent categories such as VS sport, loungewear/sleepwear and swim will support the continued growth focus domestically as well.
200 More International Stores in 2014, Reaching to 1070
International sales of $1.6 billion at 870 stores is the base for L Brands global expansion. A little less than half is north of the border in Canada at 34 VS stores, 156 La Senza stores, and 78 Bath & Body Works locations; with the remainder in four overseas geographies — the UK, Middle East, Turkey and Southeast Asia — providing a long-term sales potential of $4 billion. In 2014, L Brands plans to add 200 international locations, and so far, nada a mention of continental Europe. Having just visited McArthurGlen’s Noventa Designer Outlets outside of Venice, I can attest to the demand in that wealthy enclave of northeast Italy for Victoria’s Secret. As L Brand executives scour over the UK sales receipts and note Euro-based transactions, I bet Les and his team will rethink Europe too.
L Brands reported Q3 sales of $2.2 billion, up 6%; on a 3% same-store sales gain. October saw a sales acceleration with an 8% comp gain, 10% at VS. Q3. EPS guidance was updated to the high end of L Brand’s previous $0.23 to $0.28 guidance. L Brands shares (NYSE: LTD $63) aren’t cheap, trading at 19X forward consensus EPS estimates, and at a 5% premium to peer retailers, but its staple-like qualities along with its global branding power suggest a premium is warranted.
L Brands is truly a leader with demand for emotional brands outstripping supply; strong management acumen that focuses on retailing ABCs; and an iterative approach to implementing strategy. This is a company I can believe in. And we haven’t even looked at L Brand’s focus on improving speed-to-market and returns on investment of +30% at new VS and Pink stores. Really, it’s hard to imagine Congress mucking this up!