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Bear of the Day: L Brands (LB)

Benjamin Rains

L Brands’ (LB) Bath & Body Works has performed well recently, but its Victoria’s Secret brands have dragged the company down. Shares of LB have fallen 28% in the last 12 months as part of a much larger three-year decline as shopping habits and consumer sentiment evolve.

Overview & Problems

As we mentioned at the top, L Brands owns Victoria’s Secret, Victoria's Secret PINK, and Bath & Body Works. The company’s operations include nearly 3,000 company-owned stores throughout the U.S., Canada, the U.K., China, and more. L Brands also operates roughly 650 franchised locations and, like every other retailer, has tried to expand its e-commerce business.

Overall, L Brands’ revenue has continued to climb in the midst of the rough stretch. But the disappointment at Victoria’s Secret has led to increased worries that include CEO turnover and calls to break up the business. The lingerie unit’s former CEO Jan Singer resigned last fall after just two years with the company. Since then, New York-based hedge fund Barington Capital Group LP has urged the company to split its growing Bath & Body Works business from the faltering Victoria’s Secret. This would move would be similar to Gap’s (GPS) recent choice to sperate Old Navy.

Barington pointed out in a letter that the company was far too slow to enter the booming athleisure market, which Nike (NKE), Adidas (ADDYY), and Lululemon (LULU) have all taken advantage of. The firm did praise the company’s decision to re-enter swimwear—after it abandoned its seemingly popular swimwear and apparel categories in 2016—as the likes of Target (TGT) attract consumers to its growing fashion portfolio.

Victoria’s Secret also faces competition from up-and-coming brands ThirdLove and American Eagle (AEO)-owned Aerie. With that said, Victoria’s Secret saw its fourth-quarter comparable store sales slip 3%, with in-store sales down 7%. Meanwhile, Bath & Body Works comps jumped 12% to help overall Q4 comps pop 3%.

The former president of luxury label Tory Burch, John Mehas, did take over as chief executive at Victoria’s Secret shortly after Singer stepped down on the back of continued comparable sales declines. Nonetheless, Barington thinks the company needs to expand beyond its current focus on racy push-up bras. “Victoria’s Secret’s brand image is starting to appear to many as being outdated and even a bit ‘tone deaf’ by failing to be aligned with women’s evolving attitudes towards beauty, diversity and inclusion,” Barington wrote in a March 2019 letter.



Outlook & Earnings Trends

LB shares are up 7% in 2019, which still falls well below the S&P 500’s 15% climb and its industry’s 9% growth. Despite the recent positivity, L Brands stock has tumbled 28% during the last year and 65% over the past three years. And the chart helps investors see just how quickly things turned negative for the once high-flying retailer.

Looking ahead, the company’s Q1 fiscal 2019 revenue is projected to dip 2.6% to touch $2.56 billion. On top of that, LB’s second-quarter sales are expected to dip 1.8%, with full-year 2019 revenues projected to slip 0.70%. Peeking a bit further ahead, L Brands’ fiscal 2020 revenue is projected to climb 1.2% above our current year estimate.

At the bottom end of the income statement, the company’s adjusted first-quarter earnings are projected to tumble 100% from $0.17 per share in the year-ago period to break-even earnings, or $0.00 per share. For the full year 2019, L Brands’ adjusted EPS figure is expected to sink 16.3%. On top of that, the company’s 2020 earnings are projected to come in far below 2018. And L Brands’ earnings estimate revisions have turned far more negative recently, especially for 2019.



Bottom Line

L Brands is a Zacks Rank #5 (Strong Sell) at the moment based largely on its recent wave of negative earnings estimate revision activity. Therefore, the company might be one to stay away from as it tries to figure out what’s next for Victoria’s Secret.

Investors still interested in the broader Retail-Apparel and Shoes industry might instead turn to Abercrombie & Fitch (ANF), Canada Goose (GOOS), Kering SA (PPRUY), and Nordstrom, Inc. (JWN), which are all either Zacks Rank #1 (Strong Buy) or #2 (Buy) stocks right now.

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