Shift in consumer preferences pose 'substantial threat' to L Brands' rating
L Brands, the American retail conglomerate known for its iconic brands Victoria's Secret and Bath & Body Works, is facing a series of challenges that have led to a downgrade in its rating by Moody's.
In a recent move, Moody's downgraded L Brands' corporate family rating from Ba1 to Ba2. The decision was based on continued negative comparable store sales and operating margin compression at Victoria's Secret, according to Moody's Vice President Christina Boni. Moody's has also put L Brands on review for further downgrade.
The struggles at Victoria's Secret, which accounted for $7.4 billion in sales last year, have been compounded by changing demographics and consumer preferences, as well as a long history of sexualized products and marketing that has been a point of contention. In August, comps at Victoria's Secret fell by more than 5%, contributing to a 3.5% top-line sales decline in the third quarter for L Brands as a whole.
Despite these challenges, Moody's analysts noted that L Brands has popular well-recognized brand names, healthy cash flows, moderate leverage, and good liquidity.
In an effort to address these issues, L Brands has met with investment banks about its strategic alternatives, which could potentially include a spin-off of the lingerie brand from Bath & Body Works. The company's Chief Financial Officer, Stuart Burgdoerfer, has stated that L Brands has a history of managing its portfolio to drive value for shareholders, including splits, spins, and sales.
Meanwhile, Bath & Body Works continues to perform well, posting a comp sales increase of 9% in the latest quarter. However, this was not enough to make up for the deterioration at Victoria's Secret.
The downgrade and the ongoing review by Moody's come at a time when L Brands is also dealing with the fallout from the decades-long relationship between its founder and Chairman Leslie Wexner and the disgraced financier Jeffrey Epstein.
As L Brands navigates these challenges, it remains to be seen how the company will proceed with its strategic alternatives and whether it can turn around the fortunes of its flagship brand, Victoria's Secret.
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