L Brands Down 37% in 3 Months: More Pain or Relief Ahead?

Despite undertaking several strategic measures to drive performance, L Brands, Inc. LB has failed to impress investors. The stock has witnessed a sharp decline of 36.7% in the past three months, wider than the industry’s fall of 7.1%. The company’s recent performance indicates that it may take some more time to adjust to changing retail landscape.

However, other stocks such as Tapestry, Inc. TPR, Zumiez Inc. ZUMZ and Abercrombie & Fitch Co. ANF, belonging to the same industry, have witnessed a rally of 20.1%, 13.3% and 35.4% in the past three months, respectively. Today, we will focus on L Brands and try to analyze the factors that are keeping investors away from the stock.

More Pain Ahead

In spite of beating estimates for earnings and sales in the fourth quarter of 2017, this Zacks Rank #4 (Sell) company’s stock was affected by dismal first-quarter and fiscal 2018 outlook. Per management, it anticipates first-quarter comps in low-single digits. Earnings per share are envisioned in the range of 15-20 cents, down from 33 cents in the year-ago quarter.

For fiscal 2018, the company expects comps to increase in the 2-4%, range while sales are estimated to be 2 points higher than comps. Management projects earnings in the band of $2.95-$3.25 per share, compared with $3.20 last year.

Analysts were expecting the company to be back on track after disappointing performances in the past few quarters. However, a dismal outlook forced them to slash their estimates. In the past 30 days, the company’s fiscal 2018 and 2019 earnings estimate have moved down 31 cents and 32 cents to $3.17 and $3.42, respectively. In the same time frame, first-quarter fiscal 2018 earnings estimate have declined to 19 cents from 32 cents, respectively.

 

Further, gross margin, which contracted in all of the four quarters in fiscal 2016, disappointed investors in 2017. In the first, second, third and fourth quarters of fiscal 2017, adjusted gross margin contracted 320, 120, 190 and 100 basis points (bps) to 37.1%, 37.3%, 37.8% and 42.3%, respectively.

The downside was primarily caused by buying and occupancy expenditure deleverage in the quarter. The metric was affected by fall in merchandise margin rate. Management expects first quarter fiscal 2018 gross margin rate to decline year over year, due to fall in merchandise margin rate, somewhat offset by lower buying and occupancy expenses.

Performance of Victoria’s Secret has been a cause of concern for quite some time. In an effort to streamline Victoria’s Secret business, the company made some strategic changes in 2016. However, these efforts are yet to show fruitful results. In fourth-quarter fiscal 2017, sales at Victoria’s Secret Stores declined 1.2% to $2,038.3 million, while Victoria's Secret direct sales were up 19.9% to $630.6 million. Total Victoria’s Secret sales rose 3.1% to $2,668.9 million, while comparable sales fell 1%.

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here..

Bottom Line

Undoubtedly, the aforementioned factors are enough to unnerve investors. Nevertheless, L Brands continues to revamp business by improving store experience, localizing assortments and enhancing direct business. The company is focusing on cost containment, inventory management, merchandise and speed-to-market initiatives.

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