Skip to Content
Stock Analyst Update

L Brands Underwhelms, Shares Look Cheap

Near-term results crimp operating income, but our long-term forecast remains intact.

Mentioned:

Narrow-moat  L Brands (LB) reported mixed second-quarter results, with strength in the Bath and Body Works (33% of total sales) segment offset by continued struggles at Victoria’s Secret (58%). Total net sales grew 8% in the quarter, ahead of our 2% 2018 forecast, but at the cost of profitability, with operating margin dropping 330 basis points to 7.6% versus our forecast of 7.9%. As a result, management cut full-year EPS guidance for the second consecutive quarter to $2.45-$2.70, below our forecast of $2.91 and prior guidance of $2.70-$3.00. While near-term results crimp operating income, we believe our long-term forecast remains intact, including average sales that grow 3% and operating margin that levels around 11%, as the Bath and Body Works business will continue to succeed and the strength of the Victoria’s Secret brand will outlast the near-term fashion headwinds that have reduced segment profitability. After incorporating these near-term results, we do not plan to materially alter our $43.50 fair value estimate and see the pullback in shares as an attractive opportunity to invest in the name.

The Victoria’s Secret segment reported in-store comparable sales down 5%, in line with our forecast, but merchandise margins contracted significantly at the brand driven by additional in-store promotions to drive traffic. We continue to expect gross margin headwinds as inventory growth outpaces revenue growth in the quarter (up 17.6% versus 8.3%, respectively), seen in our full year 38.4% gross margin estimate for the firm (down 100 basis points from last year). While in-store sales have lagged, we are encouraged by management's renewed focus on online sales that grew 22% in the quarter. We expect the firm's improved omnichannel offering will allow the firm to capitalize on the brand's strength to drive higher-margin sales.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.