L Brands on Wednesday reported that fourth quarter net sales fell to $4.7 billion from $4.9 billion in the year-ago quarter, as comparable sales fell 2%. It was the last quarter the company is expected to report results from Victoria's Secret, of which a majority stake was sold to private equity firm Sycamore Partners last week for $525 million. The deal is expected to close in the second quarter.
That transaction is taking a toll: The company reported pre-tax impairment charges of $725 million related to Victoria's Secret goodwill and store-related assets. Operating income shrank to $81.7 million from $799 million a year ago, and the period swung to a net loss of $192 million, down from net income of $540 million last year, according to a company press release.
Otherwise the pattern was familiar, as fourth quarter comps at Victoria's Secret fell 10%, while comps at Bath & Body Works rose 10%, with a 5% increase in physical stores and a 32% rise in direct sales at the personal care brand.
L Brands' fourth quarter report itself revealed few surprises — that was accomplished last week when the company announced that Sycamore is snapping up a 55% interest in its struggling lingerie business.
Even that was somewhat expected after months of pressure from some analysts and investors. However, some details that have emerged have revealed the move's downsides, or potential downsides. For one thing, L Brands itself is the entity holding on to the remaining 45% stake in Victoria's Secret, which means it will continue to suffer from the brand's failings to some extent. Meanwhile, Bath & Body Works, a smaller brand than Victoria's Secret, is now the major breadwinner.
"45% of [Victoria's Secret] is better than 100%, but [the brand's] contribution in 2020 is a wild card," MKM Partners Managing Director Roxanne Meyer said in emailed comments.
The personal care brand's strength "has persisted," noted BMO Capital Markets Managing Director Simeon Siegel in a client note on Wednesday. But he also said that even with the sale, L Brands is in "limbo," considering that Bath & Body Works has now seen three straight quarters of margin declines and that executives say they expect margin pressures to continue this year, in part due to ongoing occupancy costs, fulfillment expenses as e-commerce rises, and plans to open new Bath & Body Works stores.
Indeed, the company now says that it will add a net 70 in the U.S. this year, and that frayed some nerves. Credit Suisse analyst Michael Binetti called the move, which he said more than triples the rate of U.S. new store openings compared to the net 18 opened last year and net 27 in 2018, "the most concerning update" to the company's post-deal plans. He, too, noted the recent margin challenges.
The brand "already has ~1,700 US stores with a large concentration in malls," he wrote in emailed comments. "Importantly, with the stock likely to trade on BBW's growth prospects alone from here, we'd be concerned by any signs of the company overly exerting its growth capabilities (like tripling its store growth) — particularly with Old Navy's recent plans to double store count fresh in mind."
Executives on a conference call with analysts Wednesday said that new stores will be located in strip-style shopping centers rather than enclosed malls, a tactic recently taken by many retailers, including Sephora, but most notably Macy's. Because they are smaller centers with easier parking, such centers are more convenient for shoppers compared to traditional malls, but don't get the same level of foot traffic.