What’s Behind L Brands’ Stock Upsurge

November 11th, 2014 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

L Brands (NYSE:LB) is among the very few specialty retailers in the U.S., who have performed exceedingly well amid the retail market slump. The company’s shares are trading at an all time high of $71, and have increased by more than 20% in the last three months, driven by earnings beat and a brokerage ratings upgrade. The parent company of Victoria’s Secret and Bath & Body Works is consistently performing better than market expectations, thanks to its dominion in the intimates and personal care markets. During the first two quarters of 2014, L Brands’ profits turned out better than analysts’ estimates, with strong topline growth and fewer promotional activities. At the end of the second quarter, the retailer even raised its full year EPS guidance, expecting its strong sales growth to continue during the back-to-school and holiday season. In September, L Brands reported a robust 6% rise in its comparable sales, that was marginally ahead of the consensus estimate. This growth looks even more pleasing considering that the overall retail market growth slowed down from August to September, but L Brands’ growth picked up from the previous month.

Our price estimate for L Brands is at $70, is just below the current market price.

See our complete analysis for L Brands


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Apart from the company’s strong market position, there are a couple of other factors that are adding more promise to L Brands’ already bright future. The retailer’s direct-to-consumer segment, which was a cause of concern for the past several quarters, is gradually recovering. The company is slowly expanding its reach in international markets, where the response has been promising. These factors, along with L Brands’ strong financial performance, have encouraged several firms to upgrade their investment ratings for the company. Bank of America recently upgraded L Brands to neutral, after Wells Fargo & Co. upgraded its investment rating from market perform to outperform. Before that, RBC Capital had raised its price target for the company from $68 to $70, and Telsey Advisory Group had uplifted its target price from $73 to $80. Even Credit Suisse has revised its target price from $73 to $74, while reiterating its outperform rating for L Brands.

We have also revised our price estimate for the company from $62 to $70, and have made the following changes in our pricing model. Backed by its market leader position in the U.S. and expansion in lucrative international markets, we expect Victoria’s Secret’s revenue per square feet to increase at an average annual rate of 3.5% for the next five-six years, while our previous forecast stood at 2.8%. We have increased our growth forecast for Victoria’s Secret’s direct revenues to 7.8% (average annual rate) from 3%, considering the surge in industry-wide e-commerce sales and resurgence of the brand’s direct-to-consumer channel. In addition, we have made small adjustments in Bath & Body Works‘ revenue per square feet and e-commerce revenue growth.

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