Will L Brands $400 Million Cost-Cutting Strategy Work?

L Brands Inc. (NYSE: LB) surged on Wednesday, hitting a new 52-week high, after the company unveiled a new cost-cutting strategy that it will employ. This plan involves potentially spinning off Bath & Body Works, as well as the Victoria’s Secret Beauty and PINK businesses.

The company said that it expects to deliver approximately $400 million in annualized cost reductions through its profit improvement plan for Victoria’s Secret and actions to decentralize and streamline shared corporate and other functions.

L Brands expects to achieve about $175 million of savings in the fiscal 2020 year. The company also expects to record pretax severance costs of roughly $75 million related to layoffs in the second quarter.

Ultimately, the company will cut its home office headcount by 15%, or 850 associates. At the same time, it is executing its previously announced plan to close 250 Victoria’s Secret stores in 2020, while negotiating with landlords for ongoing rent relief.

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Internationally, L Brands is working to reduce operating losses in company-owned businesses in the United Kingdom and China. In the United Kingdom, the company is restructuring lease agreements and exploring the sale of the business to a joint venture or franchise partner. In China, the firm closed its flagship store in Hong Kong and is close to a resolution to close or restructure lease terms on other unprofitable stores.

L Brands also gave a business update for its second quarter, which it will report in mid-August. The company said that total net sales are expected to be down about 20% year over year, which includes an increase of 10% at Bath & Body Works and a 40% decline at Victoria’s Secret.

Total direct channel sales at both of these businesses are up significantly compared to last year, but they are offset by a decline in store sales, as stores were closed for some time during the COVID-19 pandemic.

For the second quarter, analysts are calling for a net loss of $0.70 per share and $1.89 billion in revenues. The same period of last year reportedly had $0.24 in EPS and $2.9 billion in revenue.

L Brands stock traded up about 35% to $25.75 on Wednesday, in a 52-week range of $8.00 to $26.66. Analysts have a consensus price target of $16.50.

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