In This Article:
Earlier this summer, I raised questions about the sustainability of L Brands' (NYSE: LB) dividend, given the company's deteriorating profitability in this new age of retail and its surging debt load.
Sure enough, L Brands just decided to cut its annual dividend in half, from $2.40 to $1.20 per share. At the current stock price, that gives the stock a yield of about 3.5%. In addition, management decided to close down its smaller Henri Bendel high-end cosmetic brand, while pursuing "strategic alternatives" for its small La Senza subsidiary. That's a way of saying the company is looking to sell the subsidiary. The company also announced management changes at Victoria's Secret, the company's largest brand.
Now that the proverbial bandage has been ripped off, is the stock compelling?
L Brands cuts its dividend. Image source: Getty Images.
A positive mirage of a quarter
At first glance, L Brands' third-quarter results don't seem so bad. Revenue increased 5.7%, with same-store sales growing by 4%. In addition, the company raised its full-year adjusted earnings-per-share estimate from between $2.45 and $2.70 to between $2.60 and $2.80.
So what's wrong? Several things. First, revenue growth may not be as good as advertised. L Brands began employing a new accounting standard this year, which will have the effect of inflating revenues relative to last year...as well as costs. The company's margin picture looks much uglier, with adjusted operating income falling to $155.6 million from $231.7 million in the year-ago quarter -- a 33% decline.
And while the current quarter's guidance may be positive relative to recent guidance, the current full-year guidance is still below the guidance of $2.95 to $3.25 given at the beginning of 2018.
Investors are also right to worry what might happen when the economy starts to sour.
Victoria's not-so-secret struggles
Also worrying investors: While the company's Bath & Body Works brand is growing strongly, the company's core brand, Victoria's Secret, deteriorated, showing a 6% drop in comps.
| Brand | Q3 Same-Store Sales Growth (stores and online) | Q3 Store-Only Same-Store Sales Growth | % of Company Revenues |
|---|---|---|---|
| Victoria's Secret | (2%) | (6%) | 55.1% |
| Bath & Body Works | 13% | 10% | 34.4% |
Source: L Brands Q3 2018 press release.
Since Victoria's Secret is struggling and makes up the largest percentage of revenues, I wouldn't expect overall company metrics to rebound anytime soon. And while Bath & Body Works is growing strongly, it's unclear to me how fast any consumer retail brand can continue to grow by double digits. If Bath & Body Works slows down for any reason, things could get even worse.