Shares of L Brands (LB) are on the rise on Thursday after the owner of Victoria's Secret reported better than expected revenue and earnings for the quarter, helped by the strength of its Bath & Body Works. Despite the stronger quarter, Jefferies analyst Randal Konik recommended selling the stock on the rally as he believes Bath & Body's strength will not continue into perpetuity, and as he sees L Brands' earnings "continuing to spiral lower" over the next two years. Also cautious on the name, MKM Partners analyst Roxanne Meyer said she expects the stock range to remain bound near-term given soft lingerie, PINK and Beauty and no strategic update until the company's analyst day.
RESULTS: On Wednesday after market close, L Brands reported first quarter earnings per share of 14c and revenue of $2.63B, both above consensus of 0c and $2.56B, respectively. The company also said that first quarter comparable sales declined 5% at the Victoria's Secret segment and increased 13% at Bath & Body Works. Additionally, L Brands announced flat total same-store sales in the first quarter, said it sees second quarter earnings per share between 15c-20c, and narrowed its 2019 earnings per share view higher to $2.30-$2.60 from $2.20-$2.60. L Brands expects second quarter same-store sales to be flat.
With respect to tariffs, the company said its forecast does include the additional impact from the recent increase to the List 3 of tariffs on goods imported from China. "Our largest country of supply is the U.S. where the majority of Bath & Body Works and Victoria's Secret Beauty products are FINAL 6 produced. Our lingerie and apparel merchandise is principally produced in Asia, but across a well-diversified group of countries, with no one country having a majority of production. China currently represents a little under 20% of our total production, and we have taken and will continue to take action to mitigate our exposure to China."
L BRANDS SHOULD BE SOLD INTO EARNINGS RALLY: In a post-earnings research note, Jefferies analyst Randal Konik argued that L Brands’ first quarter results show that while Bath & Body Works is still strong, Victoria's Secret is "collapsing." The analyst believes that Victoria's Secret will soon generate losses as PINK sales decline and fixed cost deleverage ensues. The Bath & Body Works business put up a “solid quarter with great comps and better margins" but he does not see this "continuing into perpetuity" and would sell LB shares on strength, which he views as "fleeting."
Bath & Body Works is "very dependent" on mall traffic, which means that current strong trends seen over the past few years are not sustainable, Konik contended. The analyst pointed out that his model shows decelerating revenue growth over the next two years, arguing that Bath & Body Works topline turns lower by Holiday 2019 and remains negative in calendar 2020, while margins begin to erode into the high-teens into next year. Konik reiterated an Underperform rating and a $16 price target on the shares.
While acknowledging L Brands' first quarter earnings beat and a "highly impressive" comp and margins at the company's Bath & Body Works, MKM Partners' Meyer highlighted that the Victoria's Secret line was "generally in line with weak expectations." "In line" could be well perceived in the current environment, she contended, but warned investors not to assume stability in L Brands business. Meyer checks pointed to high levels of promotional activity/clearance during the first quarter, and her concern is that consumers could be fatigued by the time the semiannual sale comes around. With lingerie, PINK and Beauty all soft, International not improving and no strategic update until the company's analyst day, the analyst thinks the stock range will remain bound near-term. She reiterated a Neutral rating and $26 price target on the shares.
SELF-INFLECTED ISSUES, COMPELLING OPPORTUNITY: Not as bearish, Wells Fargo analyst Ike Boruchow lowered his price target for L Brands to $35 from $42, but reiterated an Outperform rating on the shares. The analyst acknowledged that shares have continued to come under pressure over the past 18 months due to self-inflected issues, as well as more recent macro concerns. But with that said, he noted that first quarter delivered a "nice beat" on earnings per share, while the company raised the low-end of its fiscal year earnings per share outlook as well. Overall, Boruchow continues to believe that the risk/reward on the stock makes a lot of sense at current levels and creates an "extremely compelling" opportunity for value focused investors.
PRICE ACTION: In morning trading, shares of L Brands have jumped almost 16% to $24.84.
