Dive Brief:

• Moody's downgraded L Brands and put the company on review for further downgrade, according to a Tuesday press release.
• Analysts lowered the company's corporate family rating from Ba1 to Ba2, citing "continued negative comparable store sales and operating margin compression at Victoria's Secret," Moody's Vice President Christina Boni said in the release.
• To its advantage, the company has "popular well recognized brand names," healthy cash flows, moderate leverage and good liquidity, the analysts added.

Dive Insight:

The Moody's downgrade comes about a month after L Brands posted a top-line sales decline of 3.5% in the third quarter, which actually obscured the depth of Victoria's Secret's troubles.

Bath & Body Works — a niche, mostly mall-based retailer just like its lingerie-focused counterpart at L Brands — posted a comp sales increase of 9%. But that wasn't enough to make up for the deterioration at Victoria's Secret, where comps fell 7%. 

GlobalData Retail Managing Director Neil Saunders noted in August, after another quarter in which comps fell by more than 5% at Victoria's Secret, that the brand had responded to demand for modernized styles, changes well-received by its customers. "However, one of the issues is that some shoppers are still drifting away from the brand and, as of yet, Victoria's Secret has not won back much of the trade that it has lost over the past few years," he said. 

In the brand's favor, as Boni and the Moody's analysts note, is Victoria's Secret's scale, with more than 1,000 mainline stores and $7.4 billion in sales last year.

"Its merchandising strategy and supply chain have historically enabled the company to ensure product freshness and higher inventory turns relative to other specialty retail operators," the Moody's analysts said. But, they added, "Changing demographics and consumer preferences continue to be a significant risk, particularly as the company works to turnaround the Victoria's Secret brand." 

The decades-long relationship between L Brands founder and Chairman Leslie Wexner and accused child sex trafficker Jeffrey Epstein, who died by suicide earlier this year, has also hurt the company's reputation and cast a shadow over Victoria's Secret's long history of sexualized products and marketing. 

As L Brands has tried to repair the reputation, brand and sales of Victoria's Secret, the company has considered a spin-off of the lingerie brand from the far healthier Bath & Body Works, CNBC reported in November citing anonymous sources. The Deal reported in December that L Brands had met with investment banks about its strategic alternatives.

Asked by an analyst in November about whether the company was exploring options for its two main brands, L Brands CFO Stuart Burgdoerfer said, according to a Seeking Alpha transcript: "You know that we have a long history of managing the portfolio of our businesses to drive value for shareholders. That history includes splits and spins and sales. The board periodically evaluates those opportunities to increase shareholder value over time, and the Board does receive input from outside financial advisors with respect to those subjects."