Can This Retail Giant Survive The Coronavirus Pandemic?

As COVID-19 cripples the already-struggling retailer sector, L Brands has seen an important deal fall by the wayside, leaving its future in doubt

American fashion retailer, L Brands (NYSE: LB), has taken a huge hit during the economic downturn, with its recent earnings report revealing a third straight quarterly loss. To make things worse, Sycamore Partners has clipped the wings on a deal to buy a 55% stake in Victoria’s Secret which is owned by L Brands. Net sales for the first quarter of 2020 were already down 37% to $1.65 billion, but now that the $525 million deal is off, can the company bounce back in this tough economic climate?

How has the Coronavirus affected L Brands?

L Brands was struggling with its lingerie business before the pandemic, and sales for Victoria’s Secret have played a big role in that, falling by 46% year-on-year in Q1.  The mother company said it expects to close around 250 out of 1,091 Victoria’s Secret and PINK stores across the U.S. this year, with more closures to follow.

However, it’s Bath & Body Works segment has helped keep the business afloat, with e-commerce orders up by 85%, but even that might not be enough as overall sales still fell 18% due to the pandemic. 

Is L Brands in a good financial position?

Many companies are in a similar position to L Brands as a recent report by the U.S. Chamber of Commerce revealed that more than 40% of small businesses won’t survive the next six months in these tough economic times. For larger businesses, it really depends on their financial stability.

At L Brands latest earnings call, it reported that same-store sales rose by 4% overall, but still recorded a net loss of $296.9 million compared to a profit of $40.3 million a year ago. This clearly shows how much trouble the company is in financially, and now that the Victoria’s Secret deal is off, L Brands will have to look at other ways of getting back in the green. It does have $957 million in cash on hand, but considering its huge debt of $5.5 billion it just posted, that money won’t last too long. 

What about the rest of the retail industry?

It is looking bad for the likes of J.C Penny (NYSE: JCP), which is considering filing for bankruptcy protection, while J. Crew Group (NYSE: JCG) already filed for Chapter 11 bankruptcy earlier this month after struggling with too much debt in recent years.

The problems won’t end with the lockdown either because once stores reopen, social distancing is not likely to go out of fashion. All retailers should be looking at building their online presence just like Bath & Body Works has managed too during these uncertain times. 

What is the future of L Brands?

It is going to be a tough road ahead for L Brands, but it has announced a plan B in which it intends to run the lingerie brand as a standalone company and establish Bath & Body Works as a public company. Litigation is also expected to be settled with Sycamore Partners, which will officially bring an end to the dud deal. 

It is predicted that revenues could fall by about 25% between now and 2021 due to lower demand, economic downturn, and supply constraints. However, I think the company will do whatever it takes to keep its brand alive and if that means closing more Victoria Secret stores then so be it.

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