Call Details:
Date/Time: Friday July 30th at 11:30 AM EDT Add to Calendar: CLICK HERE
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Our Note on LB From Last Week
We’re taking up our numbers on LB. The company held its investor days for both Bath and Body Works and Victoria’s Secret with the new separate management teams as we are just two weeks away from the separation into two independent public companies. Looking at the momentum in these businesses and the opportunities in front of them, there is just way too much EBITDA generation to ignore LB at this market price. The pre-covid leverage issue is gone and both companies will likely be able to pursue cash return/buybacks on strong cash generation post separation. For LB we see current fair value at $80-$100, upside to $120+.
As we look at BBWI, you have a history of great execution, massive four wall profitability, continued HSD revenue growth and the company mapping out a path to $10bn in revenue. We think the BBWI categories remain above pre-covid levels for an extended period of time, and that the business has a greater than expected ability to comp the comp evidenced by the 2Q performance to date and aided by a further return of foot traffic to shopping centers as 2021 progresses. We struggle with how BBW doesn’t get at least a low double digit multiple as a standalone company meaning a value of around $21bn to $24bn on our numbers.
On the VSCO side, the rate of margin recovery during the last year is astounding. We have highlighted how apparel is likely to show big earnings results in the coming quarters, and the VSCO business has remained strong in 2Q despite being past peak stimulus. We could see margins go up a lot more before the expected reversion to more ‘sustainable’ levels. Still, management is signaling $600mm in run rate savings vs 2019 levels, giving back just $100mm of one time covid concessions. Stores have been closed, leases renegotiated, and the brand reset for relevance with today’s consumer. On an apparel recovery we think we’re easily seeing low to mid-teens EBITDA margins and nearly $1bn in EBITDA as a base case. Given the market’s recent doubt of LB/VS, we’ll cut the multiple here to mid to high single digits, but we should remember that back when LB was a VS dominated company it traded over 10x several times. All in that gives us a fair enterprise value around $5.5bn to $7bn for VSCO.
LB remains a Best Idea Long and we expect to see some real value be unlocked on the coming separation.
