The L Brands action is still not a buy despite the promises of change

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If the first step is to admit that you have a problem,
The Brands

(ticker: LB) may have started the process of repairing the cause of the loss of more than half of its stock in 2018. Do not expect the stock to bounce back so soon.

Last March, in this space, we recommended investors to sell L Brands, while the stock had already fallen by 30% since the beginning of the year. At the time, most analysts felt it would be relatively easy to fix the iconic Victoria's Secret brand. We now know that something about Victoria's Secret is fundamentally broken, as Jefferies analyst Randal Konik warned more than two years ago.

Last week, L Brands admitted it. About the company, L Brands CFO Stuart Burgdoerfer told an analyst's question that "everything is on the table" when it comes to rejuvenating the Victoria's Secret brand. Of the actions undertaken, 53 stores are closed.

L Brands posted a profit above expectations (a profit of 6 cents per share against 2 cents on Wall Street), but has presented disappointing forecasts. It expects earnings of between $ 2.30 per share and $ 2.60 per share in 2019, which is below expectations for $ 2.75. Same store sales increased by only 3%, despite significant reductions. The company refused a request for additional comment.

Bulls had a vested interest in focusing on the expectation of change at Victoria's Secret, namely Bath & Body Works. The unit's comparable store sales increased by 12%, double their rate in the same quarter in 2017. Buyers said that with Bath and Body Works losing weight, and Since stock trades are only 11 times earnings in 2019, investors are essentially getting Victoria's secret for free.

In fact, this was a big part of Barclays analyst Chethan Mallela's decision to upgrade L Brands to overweight Equal Weight. "The performance on the Victoria's Secret turnaround remains the biggest lever of confidence and multiplicity for LB and we are more and more comfortable with the steps taken by management to achieve this goal," he writes. Its revaluation of the title on Friday allowed L Brands shares to end the week up 5.2% to $ 27.50.

Of course, that could go in the other direction. Bath & Body Works has been growing so fast for so long that it will be harder and harder to maintain the same rate, says Jefferies' Konik. This ultimately means that it will disappoint investors in the hope of being able to continue to do the heavy lifting for L Brands. Margins at Bath & Body Works, which are now 23%, could also be too high, says Konik, who expects them to make themselves into high adolescence next year. "The Bulls think Bath & Body Works is a great company that can last," says Konik. "This is not the case."

But the biggest problem is Victoria's secret. Management is betting that the new products will bring customers back to the stores, but Konik says it's not easy to solve the problem by simply changing what's sold. Unit loses market share for new and old competitors
American Eagle Outfitters

'(AEO) of the Aerie brand and
Target
S
(TGT) Auden brand new, which will require it to offer even more discounts to be competitive.

"Victoria's Secret is in structural decline," says Konik, who is targeting a target price of $ 16 on L Brands shares. "The stock is going to be volatile, but the fundamentals direction is pretty clear."

Yes, L Brands shares are down 37% since we suggested selling on March 3rd, 2018. But change takes time. We are not yet ready to cancel our recommendation.

Write to Ben Levisohn at [email protected]