L Brands – A Sexy Investment Opportunity

Everyone keeps warning about the demise of the retail industry.  With all the commotion Amazon has stirred up, investor confidence in retail companies has fallen drastically.  In many cases this is completely justified.  Sears and Macy’s crashed and burned because they don’t offer any value to the customer that Amazon doesn’t.  As is often the case, there are some good companies left in an industry that is largely at risk whose stock price is dragged down with the rest.  I don’t think anyone honestly believes that there won’t be brick and mortar stores around in 30 years.  You might suspect people think differently if you read market news.  Everyone is scared of the retail industry.  This is great news for us! Because the stock market is a very emotional place, investors are dropping all retail stocks without a filter.  We are starting to see lots of great deals on retail companies pop up.  One of the companies on sale right now, and one we are very excited about, is L Brands.  L Brands is better known by the two largest brands it operates under: Victoria’s Secret and Bath & Body Works.

L Brands’ stock price has done little but fall for over a year now.  At its previous prices, yeah, we’d agree with the market.  It wasn’t a great deal.  At its current levels however, it might as well be Black Friday.  L Brands is currently sitting at around $44, where it hasn’t been since March of 2013.

Warren Buffet always talks of the reasons he loves Coca Cola, See’s Candy and Disney.  What he always says is that those companies spark an emotional reaction inside you when you hear their name and you can’t say that to the same extent about their competitors.  They are go-to brands.  Who can say that the words “Victoria’s Secret” or the scent of a Bath & Body Works don’t spark an emotional reaction?  They are go-to brands.  Victoria’s Secret is iconic, it will likely be relevant for the next couple decades.  These are great brands that we would love to own, but only if the price is right, and only if the financials are there to back it up.

Key Financials

  • P/E ratio of 10.83 is better than 82% of the industry, including its top competitors (AEO, LULU, GPS, HBI)
  • Operating margin of 15.93 is higher than 91% of the industry
  • Return on invested capital of 45.66% vs AEO at 25.98%, HBI at 18.08% and GPS at 26.83%
  • Return on assets is 14.74%, compared to the industry average of 2.74%
  • Operating cash flow is up considerably each year since 2014
  • Quick ratio is better than most of LB’s top competitors
  • Less than 4% of sales came from outside of the U.S.

Opportunities

Of course things are moving online, but that doesn’t mean doom and gloom for L Brands.  Physical storefronts are going to be around forever, mark my words, and L Brands does store experience better than anyone.  It was none other than Jeff Bezos, yes, the guy who is the main reason we are even talking about retail stocks taking such a hit, who said if a company does a physical storefront experience better than anyone, they should put their effort in THAT direction.  In an interview back when he had hair, Bezos said that the experience the customer gets when they enter a book store such as Barnes’s and Noble’s and smell the books and see the shelves is something Amazon can never replicate, there will always be a place for that.  This is why the panic over retail doesn’t shake my confidence in L Brands.  Let’s also not forget that Victoria’s Secret has a prominent online business.

There is also a huge opportunity for growth here.  As iconic as Victoria’s Secret is in America, less than 4% of its sales come from international markets.  Depending on how aggressively they pursue their expansion into other markets, they could become a worldwide powerhouse.  They have the firepower to do it.

Plan

L Brands stock is quite the bargain right now.  That’s the essence of what we do here at Rockvue Capital. We find bargains and extract all the value we can out of them, putting us at minimal risk with high upside.  The stock price is the lowest it has been in a little over 4 years, but even at this much value I would not be surprised to see it fall even more.  I would love to have the company in the mid to high 30s, I think $37 or even $35 is very possible but if the stock flattens out and stops moving I would not have issue buying at its current price.

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