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Investors have sold off retail stocks of all sorts in the last year from fear that e-commerce giant Amazon.com (NASDAQ: AMZN) is about to put every retailer out of business.
The Amazon panic is understandable. Amazon customers love the convenience of at-home shopping, often for lower prices than can be found at brick-and-mortar retailers.
Here’s news you can use: Not all retailers are doomed. Consider L Brands (NYSE: LB), owner of the Victoria’s Secret and Bath & Body Works chains. L Brands will not only survive the Amazon threat, but continue to thrive in the years ahead. And, it has high appeal for income investors, thanks to its 4.3% dividend yield.
The Secret Is Out
L Brands has a distinct competitive advantage that gives it a great chance at fending off Amazon: Victoria’s Secret.
Victoria’s Secret is the flagship of L Brands’ fleet, and represents nearly two-thirds of the company’s total sales. Victoria’s Secret has a bright future, first because it has tremendous brand strength, particularly among millennials. This is the generational group most closely associated with Amazon.
Victoria’s Secret seems to be a powerhouse among millennials. It enjoys the highest brand favorability ratings among millennials, according to Conde Nast survevy of fashion, retail and beauty industry in April. In the national survey of more than 2,3000 consumers aged 13-34, Victoria’s Secret received a favorability rating of 56.6%. The two companies behind Victoria’s Secret were Sephora, at 38%, and Nike (NYSE: NKE) at 29.7%. This underscores the fact that Victoria’s Secret is still the No. 1 brand in its category. It seems very unlikely that lingerie can be ‘Amazon-ed’ any time soon.
Growth in China
The second reason why Victoria’s Secret has a bright future? It has tremendous growth potential in China, a key emerging market. By the end of 2016, L Brands had 33 stores in China. In 2017, L Brands opened its first full-assortment Victoria’s Secret store in China. It is a massive, 25,000-square foot, four-story store in Shanghai. And, L Brands will open another store in Beijing in December 2017.
The growth opportunity is compelling: China is one of the world’s fastest-growing economies, with a population of 1 billion and a rising consumer class. L Brands’ international sales rose 10% last year, and once the two major China stores are completed, international growth is likely to accelerate going forward.
A Retail Stock with Healthy Fundamentals
L Brands’ overall sales rose 3% last year. Earnings per share declined 6% for the year, which was due largely to investments in strategic growth initiatives. The company got off to a rough start in 2017 — sales declined 7% in the first quarter, due to the decisions to end its print catalogue and exit swimwear. However, these decisions make sense from a long-term perspective.
Print advertising is going the way of the dinosaur. In the digital age, very few consumers can be reached through catalogues. It makes more sense for L Brands to devote its marketing resources to more effective forms of advertising, such as mobile.
As for swimwear, it is not a bad decision for L Brands to exit a non-core category. It is better for L Brands to focus its investments on its core competencies that hold the highest growth potential, such as building new stores in China.
L Brands’ fundamentals have steadily improved throughout the year. Sales fell 5% in May, which was better than analysts had expected. The company still expects to earn full-year profit of $3.10 to $3.40 per share. It is a great sign that L Brands expects to remain highly profitable, even though it is investing heavily for growth. This will be more than enough to cover the dividend, which has an attractive 4.3% yield.
The bottom line is that all retail stocks are being punished this year, but L Brands appears to be a baby being thrown out with the bathwater. Investors looking for a mix of income, growth, and a cheap valuation, should consider L Brands stock.
Disclosure: The author is personally long LB, NKE.