Victoria's Secret Restructuring Weighs on L Brands Holiday Outlook

L Brands (LB) will likely see lower profits through the first half of 2017 because of the costs of restructuring its Victoria's Secret unit, company CFO Stuart Burgdoerfer said on a third-quarter earnings conference call this morning.

L Brands, which owns Bath & Body Works as well, last night issued an earnings forecast for the current fourth quarter that's between $1.85 and $2 a share, below the FactSet consensus of $2.03 a share.

The wider than normal guidance range for the company reflects "a little less predictability given the number of changes at Victoria's Secret," Burgdoerfer said.

L Brands said last spring that Victoria's Secret would exit its $500 million swimwear business, scrap its mail-order catalog and lay off about 200 employees, resulting in a $34.5 million charge. Victoria's Secret products are sold in more than 1,500 stores worldwide, according to the company.

L Brands will offset the loss of swimsuit sales with faster growth in other categories and by saving money by abandoning the catalog and having a lower payroll at Victoria's Secret, Burgdoerfer said.

BMO Capital Markets analyst John Morris said, though, that the swimwear business attracted customers to the stores and leaving it could keep those people from buying other products such as lingerie and cosmetics.

"Based on our field team research, we know the swim category drove new customer acquisition and believe that this category exit may have knock-on effects felt throughout the business," Morris said in a note yesterday.

In all, L Brands reported third-quarter adjusted earnings of 42 cents a share on revenue of $2.58 billion. Analysts surveyed by FactSet were looking for adjusted earnings of 40 cents a share on $2.58 billion in revenue.

Adjusted earnings were down from 55 cents a share a year ago.

Some of the weakness can be attributed to effects such as a strong U.S. dollar, China investments and higher interest expenses year-over-year that hurt earnings by 9 cents a share, JPMorgan analysts said in a note.

Another analyst said she couldn't recommend the stock at present because of concern about cosmetics sales and discounts on the bras they offer. 

"We remain on the sidelines given volatility stemming from the removal of coupons and catalogs, heightened bra clearance, product evolution in the bra category, continued softness in beauty, and near-term uncertainty stemming from the softer than expected October performance at Victoria's Secret," MKM Partners analyst Roxanne Meyer said in a note today.

Shares have fallen nearly 30% so far this year. The stock rose 21 cents, or 0.31%, to $68.18 in trading on Thursday afternoon.

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