Victoria's Secret has L Brands looking good
Despite a June slump in same-store sales, the lingerie shop has boosted profit margins, signaling stronger results ahead.
The Columbus, Ohio, company attracted consumers to Victoria's Secret even though it discounted merchandize less than it did last year. And that helped push up profit margins.
Not surprisingly, same-store sales at the lingerie shops open for more than a year fell 1% in June, compared with an 11% gain last year. But making more profit on each sale is a healthy sign.
Despite the same-store sales slowdown, investors have plenty to like about L Brands.
For one, its overseas expansion is going to pay off in coming quarters. It's planning to add eight stores in Canada, where it already has 26 locations. Three new stores in the U.K., where it already has two, are slated to open this summer. Two more stores in the Middle East are also scheduled to open this year, with several more expected in 2014.
Plus, the company is investing in its stores. Capital spending is expected to increase in 2013 to $650 million as L Brands seeks to improve the performance of its flagship chain.
Victoria’s Secret posted a 7% decline in operating income in the past quarter, which lagged the company's internal forecasts. But its performance should improve as it gets a better handle on its inventory.
Also, L Brands' Bath & Body Works chain is doing well. Operating income surged 21% to $72 million, while sales jumped 5% to $530 million. Comparable-store sales rose 3%.
Sales in the current quarter are expected to rise by 4.6% and by 5.7% in the October period. If the economic rebound continues at its same pace, L Brands will easily meet these expectations, if not surpass them.
L Brands shares, though, are on the pricey side, so there's no rush to buy. It trades at a price-to-earnings ratio of 19.44, a five-year high, according to Reuters. Analysts' average 52-week price target on the stock is $53.27, about 3% higher than where it currently trades.
The shares will never be as pretty as the models the company employs for its fashion shows. But they have the potential to be solid performers at the right price.
Follow Jonathan Berr on Twitter @jdberr.
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The stock rises 9% after the company reveals strong second-quarter results.
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