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L Brands, Inc.

8/15/2014

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Anyone who's walked through the typical mall in the United States is well aware of two stores that can be found in almost every mall - Victoria's Secret and Bath & Body Works. 

Of those who have never entered a Victoria's Secret store, many have viewed and ordered from its online catalog. Many others have seen the televised Victoria's Secret Fashion Show (see below). Between Victoria's Secret and Bath & Body Works, the company is the premiere provider of bras, panties, loungewear, sleepwear, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, and personal care accessories for women.

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The 2013
Victoria's Secret
Fashion Show.
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The Company
L Brands, Inc. (LB) operates as a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and accessories. The company operates in two segments, Victoria’s Secret and Bath & Body Works. Its products include loungewear, bras, panties, sleepwear, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, and personal care accessories. The company offers its products under the Victoria’s Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites and catalogues; and through franchises, licenses, and wholesale partners. As of February 1, 2014, the company operated 2,648 retail stores in the United States; 270 retail stores in Canada; and 5 retail stores in the United Kingdom. It also operated 331 La Senza stores in 30 countries; 55 Bath & Body Works stores in 14 countries; 4 Victoria's Secret stores in 2 Middle Eastern countries; and 198 Victoria’s Secret Beauty and Accessories stores, and various small-format locations in approximately 60 countries. The company was formerly known as Limited Brands, Inc. and changed its name to L Brands, Inc. in March 2013. L Brands, Inc. was founded in 1963 and is headquartered in Columbus, Ohio. (Daily Chart) (Weekly Chart)

13 August 2014
Price $62.26
1yr Target $62.38
Analysts 25
1yr Cap Gain 0.19%
Dividend $1.36
Yield 2.18%
1yr Tot Return 2.37%

3yr DGR 34.94%
Payout Ratio 43.87%

Beta 1.07
EPS (ttm) $3.10
EPS next yr $3.58
P/E 20.08
PEG 1.80
ROA 13.80%
ROE -137.90%

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The Fundamentals
L Brand's revenues, earnings and dividends have risen for the last 5 years (as seen below) at various rates. While I'd rather like to see more consistent and steady growth rates, the fact that the three parameters are continuing upward is an excellent attribute. I understand that fashion is a very difficult business, particularly with specialty apparel market, and that variable growth rates are the norm for this industry. That said, what most intrigues me are the multiple special dividends that L Brands seems to pay out almost every year. While the amounts are unpredictable, they are extremely larger than the regular dividend. 

I expect the dividend to increase another $0.20 in each of the next two years to $1.44 in 2015 and $1.64 in 2016. I also expect additional special dividends in the future but I have no idea what the amounts of those dividends will be. They could easily be up to $1.50 in each of those two years. 

Year
2016 Est
2015 Est
2014
2013
2012
2011
2010

Revenues
$11.91 Bil
$11.28 Bil
$10.77 Bil
$10.45 Bil
$10.36 Bil
$9.61 Bil
$8.62 Bil

Earnings
$3.60
$3.17
$3.12
$2.60
$2.80
$2.49
$1.39

Dividends
UNK
UNK
$1.24 ($1.00)
$1.05 ($4.00)
$0.85 ($3.00)
$0.50 ($1.00)
$0.60

Payout Ratio
UNK
UNK
39.74%
40.38%
30.35%
20.08%
43.16%


While the revenue growth rates below have been relatively consistent, the earnings and dividend growth rates have not. I suspect that a slowing of the earnings in 2015 will reduce the special dividend and then the expansion of the growth rate in 2016 will once again expand the special dividend as well as the price of the stock. And while the dividend growth rate may slow from the torrid rate of approximately 20%, it should still remain in the very high teens. 

Revenues Growth Rates
1yr = 3.06%

2yr =  1.95%
3yr =  3.83%

4yr = 5.72%
Earnings Growth Rates
1yr = 20.00%
2yr =  5.55%
3yr =  7.72%
4yr = 22.40%

Dividend Growth Rates
1yr = 18.09%
2yr =  20.78%
3yr =  34.94%
4yr = 19.89%



The Technicals
The technicals are not over whelming but they show an overall drift upward. This is also reflected in the fundamentals. I expect this slow movement upward over time to continue and increase in 2016 as the fundamentals increase. Currently the stock is riding the upper Bollinger Band so it's not at the best price to accumulate. Personally I'd wait until the stock pulls back to its 20 day or 20 week moving average before putting in the buy. This would be in the $58-$59 area.

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Daily Chart
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Weekly Chart


The Competition
L Brands, Inc is part of the Apparel Stores Industry which is part of the Services Sector of the economy. Below are a few of the major corporations included in this industry. They are listed in the order of their market capitalization.
  1. The Gap, Inc.  (GPS)
  2. L Brands, Inc.
  3. Ross Stores, Inc.  (ROST)
  4. Nordstrom, Inc.  (JWN)
  5. Abercrombie & Fitch Company  (ANF)
  6. DSW Inc.  (DSW)
  7. The Men's Warehouse, Inc  (MW)
  8. Chico's FAS, Inc.  (CHS)
  9. The Buckle, Inc.  (BKE)
  10. Guess Inc.  (GES)
  11. American Eagle Outfitters, Inc.  (AEO)
  12. The Children's Place  (PLCE)

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Conclusion
I like this company and I've been in and out of the stock several times since I first discovered it in the 1980s. I like the benefit and surprise of receiving special dividends at different times of the year. It's just a nice little kicker on top of a very nice dividend that's in excess of 2%. At times the special dividend can double or triple the regular dividend. 

While this company would not be a core holding for me because of the inconsistency of the company's fundamentals and the finickiness of the fashion industry, I would like to be a holder of the stock. I believe this company has cornered the market in this segment of the industry and has maintained it's first place position for decades. I think this could continue for decades more. 

I intend to slowly start to accumulate a position in this stock as excess funds become available. It will never make up a large portion of my portfolio but I think it could provide a nice niche holding that produces a nice supplemental income.


The Live Interactive Chart


Additional Related Articles

The Gap - dated 4 May 2014

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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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