L Brands’ Stock Has Been Quite Volatile Of Late, But Looks Fairly Valued
L Brands (NYSE: LB) engages in the retail of women’s intimate and other apparel, personal care, and beauty products. Trefis has a price estimate of $19 for L Brands’ Stock, which is around the current market price. Notably, the company’s stock price tanked 7% late last month after it reported weaker-than-expected results for Q3 2019 (ending October) with revenues declining 3.5% y-o-y to $2.67 billion and the loss per share widening to $0.91 from $0.16 a year-ago. However, the stock recouped its losses within days after L Brands improved its guidance for Q4 during the conference call.
Our price estimate takes into account the latest earnings as well as the updated guidance. While the company provided upbeat guidance for the fourth quarter, we believe that the market has already priced in all these factors in L Brands’ valuation which looks appropriate at its current level of around $19 a share.
Below we provide a detailed explanation of the key factors that could impact the company’s valuation:
Victoria’s Secret Will Continue To Struggle
- Victoria’s Secret poor performance has been a drag on the overall results of the company. The brand’s persistently weak sales and contracting margins continue to weigh on the company’s earnings.
- Victoria’s Secret revenue declined by close to 8% (y-o-y) to $1.4 billion in Q3 2019 as the brand witnessed year-over-year sales decline across stores and e-commerce segments.
- Moreover, comparable sales were -7% as compared to -2% in the year-ago period.
- Lower sales were primarily due to lower mall traffic, failure to upgrade the merchandise and increasing competition from Aerie, Adore Me, Lively, and ThirdLove.
- The company is trying to revive its Victoria’s Secret business by introducing new products, improving its e-commerce capabilities, and through its marketing efforts.
- It is investing in the Victoria’s Secret sleep and lounge category to improve its top line.
- Despite the efforts, we expect the brand’s total sales to decline in the mid single-digit range for full-year 2019.
Bath & Body Works Is L Brands’ Crown Jewel
- Bath & Body Works in the company’s most valuable business – accounting for nearly one-third of the company’s revenues.
- The brand continued to achieve robust growth in Q3 2019 with revenues increasing by 11% driven by strong traffic, better conversion and improved average unit retail growth.
- Comparable sales were up by 9% during the quarter driven by strong sales in most categories including home fragrance, body care, and soaps and sanitizers, led by newness, innovation, and fashion.
- However, adjusted operating margin contracted by 20 basis points to 18.4% due to a combination of inflation in the supply chain as well as increased tariffs. For full-year 2019, we expect the brand’s revenue to increase by nearly 12% YoY to cross $5.1 billion.
Other Segment Likely To Turn Profitable In The Near Future
Additional details about trends in L Brands’ Other Segment revenues are available in our interactive dashboard.
Per Trefis estimates, L Brands’ adjusted EPS for 2019 is likely to be $2.52. Taken together with a P/E multiple of 7.4x, this works to a fair value of $19 for L Brands’stock which is similar to the current market price.
We also highlight how L Brands’ P/E multiple has trended over the years, and compare this key metric with that for its peers Gap, American Eagles and Urban Outfitters in our interactive dashboard.
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