L Brands Trades Below Industry Mark for 6 Months: Here's Why

Shares of L Brands, Inc. LB have not only declined but have also underperformed the industry and the overall sector in the past six months. This Zacks Rank #5 (Strong Sell) stock has lost approximately 40% as against the industry’s rise of 1.1% and the overall sector’s gain of 7.5%.

Margin contraction and the issuance of bleak view following first-quarter fiscal 2018 results, wherein the bottom line plunged year over year may cited as primary reasons behind the company’s dismal run on the bourses.

Soft View

Management not only trimmed the fiscal 2018 view but also provided muted second-quarter guidance. For fiscal 2018, L Brands now envisions comps growth in low-single digits. Earlier, management had expected the same to increase 2-4%. The company also lowered its fiscal 2018 earnings per share guidance to $2.70-$3.00 from $2.95-$3.25. In the year-ago period, the company posted earnings of $3.20. In fact, for the second quarter of fiscal 2018, earnings are envisioned in the range of 30-35 cents versus 48 cents in the year-ago quarter.

 

Declining Margin

Gross margin, a key metric which helps gauge a company’s financial health, has persistently declined in the past few quarters. In the last reported quarter, gross margin contracted 120 basis points (bps) to 35.9%. Further, 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, primarily on buying and occupancy expenditure deleverage in the quarter.

Further, in the second quarter, gross margin is expected to decline year over year and SG&A costs are anticipated to escalate considerably, as a percentage of sales. For fiscal 2018, gross margin rate is expected to decline year over year, while it was anticipated to remain flat earlier. Also, SG&A costs are likely to increase year over year in fiscal 2018.

Wrapping Up

Management is trying all means to boost the company’s performance. We believe L Brands’ sustained focus on cost containment, inventory management, merchandise and speed-to-market initiatives may help cushion the stock. Apart from these, L Brands continues to revamp its business by improving store experience, localizing assortments and enhancing its direct business. While we believe that these measures are in the right direction, it will take a while for the results to reflect the effects of the same.

Forget L Brands, Focus on These 3 Retail Stocks

Shoe Carnival, Inc. SCVL has a long-term earnings growth rate of 12% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Burlington Stores, Inc. BURL has a long-term earnings growth rate of 18.1% and carries a Zacks Rank #2 (Buy).

Fossil Group FOSL delivered an average positive earnings surprise of 54.1% in the trailing four quarters. The Zacks Rank #2 company has a long-term earnings growth rate of 5%.

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