Fitch Ratings has affirmed the ratings for L Brands, Inc. (L Brands, formerly known as Limited Brands, Inc.), including the Long-term Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmations reflect L Brands' strong brand recognition and dominant market positions in intimate apparel and personal care and beauty products, strong operating results, reasonable credit metrics and solid cash flow generation. The ratings also consider the company's track record of shareholder-friendly activities.
L Brands' strong business profile is anchored by its two flagship brands, Victoria's Secret and Bath & Body Works; a strong direct business; and a growing international footprint. The company's strong comparable store sales (comps) trends since the recession have been driven by relevant and attractive product offerings and a loyal customer base, although comps have normalized to low single digits in 2013 from 6% - 10% in 2011/2012.
In addition to positive operating leverage from strong comps growth, the company has driven margin growth through efficient inventory and expense management. EBITDA margins in the 20%-range compare favorably to the broader retail average in the low teens.
Fitch expects that L Brands can sustain comps growth in the 2% -3% range and EBITDA margin to remain in excess of 20% over the next three years. This is underscored by strong comps growth in both the Victoria's Secret brand (approximately 62% of sales and EBITDA including the Victoria's Secret direct business) and Bath & Body Works brand (approximately 27% of sales and 32% of EBITDA). Fitch expects the growth of PINK in the U.S. (which could double over the next few years from nearly $2 billion currently) and international expansion, if executed successfully, could drive top line growth in the mid-single-digit range.
Lease-adjusted leverage stood at 3.5x as of Feb. 1, 2014. Fitch expects the company to maintain a leverage profile in the mid-3x range, and fund dividends and share repurchases with free cash flow (FCF) and potential debt issuances. The company's shareholder-friendly posture is a key constraint to the rating.