L Brands Stock Have a 45% Upside Potential
A couple of weeks ago we published our first report (accessible only to our premium subscribers) on L Brands in which we urged management to change its policy in order for the company’s valuation to increase. Since that time L Brands stock has suffered from a 15% as margins and comps continued their decline and investors continued their lack of satisfaction with were things are going at the Ohio-based company. We believe that current valuation assumes a worse-than-possible scenario and neglects BBW’s true value. Our sum-of-the-parts analysis implies a $38 per share value, a 45% upside from current levels.
In addition, we believe that there’s room for measures to be made by management that will result in an improvement of investors’ sentiment towards the stock.
SOTP Analysis and L Brands Value
The company operates four segments; Victoria’s Secret, Bath and Body Works, VS and BBW International, and the “other” segment which contains brands like La Senza and Henri Bendel.
In order to value “Victoria’s Secret” and “Bath and Body Works”, we used an equal-weighted blend of three different multiples; EV to EBITDA, price to free-cash-flow, and price to earnings arrived from the multiples of “Bed Bath and Beyond” for VS valuation and “Michael Kors” for BBW valuation (we explained the reason below).
It’s no secret that L Brands’ crown jewel is BBW which has an
operating margin of 22%, a sales per square foot of $1,030 accompanied with a
6% CAGR since 2013, all figures are higher than those of Victoria’s Secret in
its heydays. We believe that BBW is worth $7.4 billion, slightly more than
the market cap of the entire company. We arrived to this valuation
by applying Michael Kors’ multiples on BBW’s metrics as we believe that the two
brands are similar in terms of operating margins (22% for BBW and 19% for
KORS), and minimal capital spending needed to sustain operations (capex for BBW
is 5.5% of sales and that of MK is 3% of sales, both considered a minimal
amount).
