The Update Issue: L Brands Splits Into Two Companies, Will 'Hard Soda' Be the Next Big Thing?

The long-anticipated break up of L Brands finally happened last week... Longtime Empire Financial Daily readers are likely familiar with the company's history. In May 2020, I did a deep dive into the rise and fall of its Victoria's Secret lingerie chain, which after a couple of decades as one of the highest-performing retailers in [...] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: L Brands Splits Into Two Companies, Will 'Hard Soda' Be the Next Big Thing? By Berna Barshay The long-anticipated break up of L Brands finally happened last week... Longtime Empire Financial Daily readers are likely familiar with the company's history. In May 2020, I did a deep dive into the [rise and fall of its Victoria's Secret lingerie chain]( which after a couple of decades as one of the highest-performing retailers in the U.S. went into a tailspin about five years ago. While anachronistic and tone-deaf marketing, poor merchandising choices, and C-suite mismanagement and scandals were wreaking havoc at Victoria's Secret, sister home and personal fragrance chain Bath & Body Works was crushing it. The purveyor of candles and body lotions was putting up some of the best and most consistent same-store sales in the mall space and boasted industry-leading margins. Victoria's Secret was like an albatross around Bath & Body Works' neck and was dragging down the valuation of the parent company. L Brands struck a deal to sell the ailing lingerie chain to private equity, but the buyer busted the deal early in the COVID-19 crisis last spring. (It's a move that buyer has to be regretting now... More on that below.) When the deal to sell Victoria's Secret blew up, L Brands promised it would find another way to split the two companies and unlock the value at its star, Bath & Body Works. After a sales process that didn't yield the price it sought, L Brands moved forward to split Victoria's Secret into a wholly separate public company via a tax-free spinoff... Even as Victoria's Secret started showing some [impressive green shoots late last year]( and was in [full-on turnaround mode by early this year]( L Brands stuck to the spinoff plan. The transaction was completed last Monday, shortly after both chains held virtual analyst days that re-introduced the new standalone companies to Wall Street and the investing public. Bath & Body Works (BBWI) and Victoria's Secret (VSCO) are now two separate companies. Even though the transaction was driven by the demands of Wall Street to unlock value at Bath & Body Works, it is ironically shares of the new Victoria's Secret that have been off to the races since the spin last week. In the seven sessions since the spin, VSCO shares are up an incredible 52%... While most folks had completely given up hope in Victoria's Secret, I always believed it was salvageable if management took the right actions. Its scale, legacy, the nostalgia that many women carry for it, sourcing and design teams, prime real estate, and a myriad of other factors made the brand prime for a comeback... if management would just stop shooting itself in the foot. In that very first piece in May 2020, I wrote... While the lingerie chain is suffering, I don't think it's permanently down for the count. Despite its well-documented issues, Victoria's Secret still has the leading market share in U.S. lingerie, and generated almost $7 billion in sales last year. The coronavirus crisis has admittedly made repairing the brand and financial damage at Victoria's Secret much harder. But with [longtime CEO Les Wexner] out of the picture, a new generation of management that is hopefully more in touch with the chain's target customer base will take over and can begin to return the storied chain to profitability. While the turnaround at Victoria's Secret has simply been breathtaking, it took years to get started. VSCO shares are indeed an overnight sensation years in the making. I always believed this could happen... but you know who didn't? Sycamore Partners, the private equity firm that walked away from buying a majority stake in Victoria's Secret at a $1 billion valuation last May. Today, the market is valuing Victoria's Secret at about $6 billion. A 500% return over 15 months isn't too bad... File this one under "greatest private equity whiffs of all time." When I first wrote about L Brands in May 2020, its stock traded around $15 per share... Today, if you put the pieces back together, it would trade around $86. While I will continue to share high-conviction investment ideas here for free in Empire Financial Daily, I'll be saving my very top ideas like L Brands for my new subscription newsletter, Empire Market Insider. In July, I did an updated deep dive into L Brands for Empire Market Insider subscribers and offered a road map for the spinoff. I continue to keep them updated on what to do with BBWI and VSCO shares now that they are separate stocks. When I launched Empire Market Insider in June, my first three picks were reopening plays, drawing on my "[Roaring 20s Redux]( theme. With COVID-19 vaccine deployment well under way and the disease seemingly in retreat in the U.S., I was sure pent-up demand for travel, entertainment, and group leisure activities was going to be huge... and I picked three under-the-radar names that were plays on this. Since then, the delta variant has been spreading... and COVID-19 cases and hospitalizations have ticked up significantly, which has acted like a dead weight on those three "reopening play" stock picks. But over the past week, two of those companies have reported absolutely blow-out second-quarter results and offered bullish guidance for what is on the horizon for the rest of the year. Both companies smashed expectations for revenues, beating Wall Street estimates by 30% and 16%, respectively. The beats were even bigger versus estimates for earnings before interest, taxes, depreciation, and amortization ("EBITDA") – one beat by 168% and the other by 55%. Both stocks moved up strongly after the robust upside surprise results... but they're both trading below where I recommended them in June, since they had fallen so much initially on the delta variant news. But both companies are knocking it out of the park – so even with the virus concerns, I'm more confident in these stocks than ever. Given they are both still below the level where I initially recommended them despite blow-out second quarters... this is a great time to consider these stocks for your portfolio. You can learn more about Empire Market Insider [right here](. --------------------------------------------------------------- Recommended Links: ['I was dead broke... until I found THIS']( A money-making strategy so powerful, it helped one man go from just $268 in his bank account to forging a 20-plus year career as one of the top value investing experts today. He's sharing the exact strategy he used to having everything he could ever want... And he says that right now, the exact setup he used to become wealthy is happening all over again. It centers around a single stock – the smallest he's recommended in seven years. 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Shares of Boston Beer (SAM) – maker of hard seltzer Truly as well as its flagship Sam Adams brew – fell 26% after reporting disappointing earnings in late July. They currently sit at a 52-week low... The company missed sales and earnings per share ("EPS") estimates by 8% and 28%, respectively, due to a slowdown in the hard seltzer category. Boston Beer blamed the hard seltzer stall-out on the at-home consumption market maturing and a tough comp versus last year's second quarter, when lockdown hoarding and pantry stocking artificially inflated results. The big challenge for the industry now is getting placement in the on-premises market... It can be difficult to find a bar or restaurant serving White Claw or Truly. I think the category still has a long runway – international adoption of hard seltzer is still minimal and eventually I think bars will come on board. But the growing pains for the hard seltzer category are real. Despite the recent headwinds, hard seltzer remains one of the biggest consumer packaged goods innovation stories of the past few decades. The category isn't even a decade old and is a $5 billion market already. Looking to build on that success, snack and beverage giant PepsiCo (PEP) is teaming up with Boston Beer to introduce an alcoholic version of its famously caffeinated iconic soda brand, Mountain Dew. Source: CNBC/Boston Beer Hard Mountain Dew should hit the shelves early in 2022 and seems primed to compete in the market for beverages that render you very drunk and very awake at the same time – a segment long dominated by the combination of Red Bull and vodka. Pepsi isn't the only non-alcoholic beverage company to use one of its brands to dip its toe into world of alcoholic beverages... Rival Coca-Cola (KO) announced last fall that it was partnering with Molson Coors Beverage (TAP) to launch an alcoholic version of its popular Mexican Topo Chico mineral water. Despite the hiccups at Boston Beer, I'm still a believer in the hard seltzer category over the long term, and I am encouraged to see the company continuing to innovate, most recently with the Pepsi joint venture. At a price-to-earnings ("P/E") ratio of 31, SAM shares are still a little too rich for me, given the growing pains. But I will be keeping an eye on them, for now, from the sidelines. Sometimes you have to manifest what you want... [Last week]( I complained about the sofa I ordered on Black Friday weekend last year going MIA, presumably somewhere in China or over the Pacific... It was a symbol of the severe supply chain disruptions being experienced by the furniture industry. Well, on Monday, I got an e-mail that it is finally arriving on August 20. Thank you for listening... Apparently, I just needed to complain to thousands of you to make it happen! In the mailbag, readers share thoughts on food delivery and capital gains taxes, and another piece of evidence there is a gender gap in how people perceive the billionaire space race... Do you agree that pent-up demand for travel, dining out, and live entertainment is likely to last for a while? Does anyone want to share any war stores from investing in turnarounds? They are almost always nail-biting investments but often very lucrative, like Victoria's Secret has been. Would you order hard seltzer in a bar or restaurant if it was available, or is it an "at home" drink only? Share your thoughts in an e-mail to feedback@empirefinancialresearh.com. "Hello Berna: I got an e-mail a few weeks ago from El Pollo Loco (LOCO) that they are going to be starting drone deliveries. It was somewhat vague as to where and when, but I did sign up to get notified if/when they come to Los Angeles! "Other than that – we go out to pick up our food – haven't used any of the delivery services despite several e-mails per week from Uber Eats urging us to use them..." – George R. Berna comment: George, you must write back in if those drones actually end up happening anytime soon! "Capital gains taxes should be zero. "Every finance equation that bases itself on the present value of discounted cash flows views taxation as an important cost that determines whether a project is greenlit or not. To maximally encourage investment, investment that also leads to lots of employment, such capital gains should be zero. "The only caveat is that such zero capital gains are limited to investment in the American market, not in labor and regulatory arbitrage. "The constant pining about billionaires not paying taxes is irrelevant because if billionaires have no income, then they can pay no taxes. This lack of income, however, does not make sense because a collateralized loan has payments that have to be made. Those payments come from income and that income comes from somewhere. "The worst part of what the complainers are angling for is what's akin to property taxes on all of your assets, whether realized or not." – O.P. "Traveling to space for science and research about the universe is critical and awe-inspiring and brings a wealth of relevant scientific data back to earth. Pretending that what Bezos and Branson did would make space travel possible relatively soon is idiotic unless they somehow get the cost down to an airplane ticket. It's all about white rich men and their toys and egos inextricably attached to their male appendages in between navel and kneecap." – Elizabeth S. Regards, Berna Barshay August 11, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](