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Why Shares of L Brands Are Soaring on Thursday

Lou Whiteman, The Motley Fool

What happened

Shares of L Brands (NYSE: LB) are up more than 13% on Thursday after the parent of Victoria's Secret and Bath & Body Works reported better-than-expected first-quarter results. Analysts, however, are skeptical that the outperformance is sustainable.

So what

After markets closed Wednesday, L Brands reported first-quarter earnings of $0.14 per share on revenue of $2.63 billion, beating consensus expectations for a breakeven quarter on sales of $2.56 billion. Bath & Body Works was the fuel behind the beat, with comparable sales up 13% for the quarter, compared to a 5% decline at Victoria's Secret.

A Bath & Body Works in-store display.

Image source: L Brands.

The result stands out against what has been a dismal quarter for most mall-based retailers and offered relief to what had been negative sentiment about L Brands. The company's shares had been down 16% year to date going into earnings.

In-store sales climbed 7% at Bath & Body Works, while declining by a similar amount at Victoria's Secret.

L Brands narrowed the low end of its full-year expectations but gave no indication the company expects the first-quarter outperformance to continue throughout the year. L Brands said it expects 2019 earnings of $2.30 to $2.60 per share compared to previous guidance of $2.20 to $2.60 per share. Analysts are expecting $2.39 per share.

Now what

Even after the beat, Wall Street analysts remain skeptical. Jefferies analyst Randal Konik in a note advised investors to sell into Thursday's rally, warning that Bath & Body Works' strength is going to be difficult to sustain and Victoria's Secret sales seem to be "collapsing."

MKM Partners analyst Roxanne Meyer meanwhile said the first-quarter results benefited from a "high level of promotional activity and clearance," keeping a neutral opinion on the shares.

Given low expectations surrounding companies like L Brands, it is no surprise that the beat is a cause for celebration on Wall Street. But until the company figures out what to do to reverse sales declines at Victoria's Secret, it's hard to see L Brands as a long-term winner.

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Lou Whiteman 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.