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L Brands (LB) Touches 52-Week Low: Time to Sell the Stock?

Zacks Equity Research

Columbus, OH-based L Brands, Inc. LB, a specialty retailer of women’s intimate and other apparel, beauty and personal care products as well as home fragrance products and accessories stock has been reeling under immense pressure primarily due to dismal top-line performance, soft outlook and foreign currency headwinds. Consequently, the company’s shares have declined 34.7% in the past six months and have underperformed the Zacks categorized Retail-Apparel/Shoe industry’s decrease of 16.4%. Moreover, the company’s shares also slipped to a 52-week low of $47.34 on Mar 22.

The Zacks Rank #4 (Sell) company’s shares have declined more than 17%  following fourth-quarter fiscal 2016 results wherein it posted lower-than-expected top-line for the second consecutive quarter. Further, it provided a tepid fiscal 2017 guidance. Earlier this month, the company also reported dismal comps for the months of February, marking the third consecutive month of comps decline.

Management projects earnings in the band of $3.05–$3.35 per share for fiscal 2017, sharply down from the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. The earnings projection includes adverse impact of the company’s decision to exit the swimwear category at Victoria’s Secret, continued investment in China as well as investment in real estate at Victoria’s Secret and Bath & Body Works.

For fiscal 2017, it envisions comparable sales to be down by low-single digit, and anticipates total sales growth to be about 3 to 4 points higher than comps on account of square footage growth and also due to a 53rd week. Moreover, the company expects the fiscal first-quarter earnings in the range of 20–25 cents, which is well below the year-ago earnings of 59 cents per share. L Brands now expects comparable sales in the first quarter to decline in the range of high-single to low-double digits year over year. Both for first-quarter and fiscal 2017, gross margin is expected to deteriorate year over year.

Moreover, foreign currency headwinds along with higher operating and interest expenses are likely to hurt the company’s upcoming results.

Let’s look at L Brands’ earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past seven days, the company’s earnings estimates for first-quarter fiscal 2017 have declined by 4% to 20 cents.

Stocks to Consider

Better-ranked stocks in the retail sector include Kate Spade & Company KATE, The Children's Place, Inc. PLCE and Foot Locker, Inc. FL. Kate Spade & Company   and Children's Place sports a Zacks Rank #1 (Strong Buy) while Foot Locker carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kate Spade & Company delivered an average positive earnings surprise of 14.6% in the trailing four quarters and has a long-term earnings growth rate of 28.3%.

Children's Place delivered an average positive earnings surprise of 39% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Foot Locker delivered an average positive earnings surprise of 2.2% in the trailing four quarters and has a long-term earnings growth rate of 9.7%.

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