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Why L Brands Stock Climbed 16% in June

John Ballard, The Motley Fool

What happened

Shares of L Brands (NYSE: LB) gained 16.2% last month, according to data provided by S&P Global Market Intelligence. The owner of Bath & Body Works and Victoria's Secret announced better-than-expected earnings in late May, which initially sent the stock sharply higher. But entering June, it gave back those gains as concerns about trade wars weighed on the broader market. 

As the G20 meeting approached in late June, worries about tariffs eased when investors were increasingly optimistic that trade talks between the U.S. and China would lead to a positive development. The rising tide lifted all boats, particularly the share prices of profitable companies with low valuations.

Victoria's Secret store front

Image source: L Brands.

L Brands stock traded for a forward P/E of less than 10 entering June. Combined with the expectation that the struggling Victoria's Secret will improve in the next few quarters, and strong performance from Bath & Body Works, that P/E figure helped send the shares higher for the month.

So what

L Brands has struggled to grow over the last few years, stemming from weak performance at Victoria's Secret. It's still considered one of the top brands in apparel, but has been steadily losing customers lately to competitors.

The problem has been customer issues with fit and comfort. Last quarter, the VS brand saw comparable-store sales fall by 5%, which offset the 13% increase at Bath & Body Works, leaving companywide comps flat for the quarter.  

But investors are optimistic about the changes coming in August and into the fall with the VS assortment. Management has done a lot of research and is well aware of the issues customers have with fit. CFO Stuart Burgdoerfer said that "substantial changes are coming in August." That statement, along with management's guidance for improving performance from VS in the second half of the year, is an encouraging development for the company.

Now what

Management is calling for comps to be up in the low single digits for the full year, which assumes gradual improvement at Victoria's Secret in the second half of 2019. Earnings per share should be in the range of $2.30 to $2.60, compared with $2.31 last year. 

The stock currently trades for a forward P/E of 10.7 times this year's earnings estimate and offers an above-average dividend yield of 4.4%

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.