Battleground: Analysts Diverge On L Brands After Results, Weak Guidance
Following quarterly results, shares of L Brands (LB) are sliding given declining sales and weak guidance. While Deutsche Bank analyst Paul Trussell remains constructive on L Brands after earnings and outlook, Jefferies analyst Randal Konik told investors that he sees ten reasons to sell the stock.
RESULTS: Last night, L Brands reported second quarter earnings per share of 48c and revenue of $2.755B, with consensus at 44c and $2.75B, respectively. Victoria Secret's parent also reported that its same-store sales were down 8% for the quarter, with Victoria's Secret store-only comps down 14%. The company also cut its 2017 earnings per share view to $3.00-$3.20 from $3.10-$3.40, and said it sees third quarter earnings per share of 25-30c, below the expected 36c. Comps for the year are expected down low to mid-single digits, while Q3 SSS are seen flat to down low-single digits.
CONSTRUCTIVE ON L BRANDS: In a post-earnings note, Deutsche Bank's Trussell told investors that he is not surprised to see L Brands' stock down given the lower full year earnings per share guidance and tempered comp expectations for the remainder of the year. Nonetheless, the analyst noted that he remains constructive as L Brands is entering the back half of the year in a clean inventory position, comp compares get easier in the second half of the year, pressure from the exit of swim and apparel last year should subside and the impact of the mix shift into sports bras and bralettes should also continue to moderate, leading to margin stabilization. Trussell reiterated a Buy rating on the shares but lowered his price target on the stock to $56 from $60. His peer at Goldman Sachs also kept a Buy rating on L Brands, but lowered the stock's price target to $59 from $67. Analyst Lindsay Drucker Mann had expected management to provide more conservative comp assumption in guidance but thought the margin cushion was sufficient to achieve earnings targets.
SELL L BRANDS: Meanwhile, Jefferies' Konik pointed out in a research note of his own that while L Brands posted second quarter earnings slightly ahead of guidance due to expense control and non-operating income gains, the outlook for the third quarter was well below the Street and 2018 guidance was lowered due to softer than expected sales trends. Further, the analyst listed 10 reasons why to sell the stock, namely: core business erosion, PINK may be coming under pressure, Victoria Secret's pricing power is waning, removal of catalog, lapping the exited categories will not be the answer to the comp weakness, Bath & Body Works at peak with difficult compares, margins starting to roll, return to shareholders may be less impressive going forward, real estate as L Brands remains highly leveraged to U.S. mall traffic, and International becoming a problem. Konick reiterated an Underperform rating and $32 price target on the stock, saying fundamentals are likely to remain pressured for the near-term.
PRICE ACTION: In morning trading, shares of L Brands have dropped 11% to $35.17.