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Bras, Bralettes, Barron’s, and a Big Dividend Problem

Last week, we published a piece on SumZero recommending a short position in L Brands (LB), the company that owns Victoria’s Secret and Bath & Body Works. The key point is that there is a fashion trend away from the complicated underwire bras sold by Victoria’s Secret for $50 – $60, and towards more casual bralettes. These are less structured garments more like a sports bra or a tightly fitted cropped t-shirt with a little elastic support.

This trend creates two problems for Victoria’s Secret. The first is that bralettes tend to sell in the $12.50 to $25.00 range so even if Victoria’s Secret keeps those sales, revenue will still decline. The second problem is that because bralettes are easier to make, it means that there is more competition. Further, because bralette sizing tends to be of the general small, medium, and large kind, they are better items for online sales than traditional bras which come in dozens of sizes. In fact, Amazon is in the process of entering the market at a sub-$10 price point with its Iris & Lilly brand.

In our piece, we noted that L Brands’ high dividend combined with declining free cash flow meant that the company was either at risk of having to reduce the dividend at some point, or to borrow in order to keep the current dividend. The latter is a temporary solution that would only buy time while the underlying business was eroding.

We were pleased to see that over the weekend, Lawrence Strauss published an article in Barron’s titled The Price of High Yields. In the article, he highlighted 10 high dividend stocks in struggling industries. Four of the 10 are retailers, and Mr. Strauss noted that of those, L Brands was the only one that wasn’t earning enough to cover the dividend. He also noted that each of the retail companies were facing competition from Amazon.

The Barron’s article is behind a paywall, but we can send a copy of our piece if you’d like more detail.

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