L Brands Stock Can Gain 2x The S&P 500, But There Is A Catch

March 25th, 2020 by Trefis Team
LB: LandBridge Co logo
LB
LandBridge Co

L Brands (NYSE: LB) stock is likely to outperform the broader S&P 500 index by a wide margin post coronavirus and oil price war crisis, going by the trends seen during the 2008 slowdown, where it fell 64% from the approximate pre-crisis peak in 2008 and recovered 158% by early 2010. The decline in L Brands’ stock, and the eventual recovery, were higher than that of the S&P 500. We compare the performance of L Brands vs. the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did L Brands Stock Fare Compare With S&P 500?

On Monday, March 9, the stock market entered into a phase of extreme volatility, with two major sell-offs on Monday and Thursday being separated by days of partial recoveries. Overall, there have been two distinct trends driving the recent sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production. L Brands’ stock declined by about 43% between 8th March 2020 and 24th March 2020 (vs. an 18% decline in the S&P 500), and the stock is down almost 44% since January 31st after the WHO declared a global health emergency in light of the coronavirus spread (vs. about 27% decline in the S&P 500 since then). The decline in L Brands’ stock is understandable, considering the impact that the outbreak and a broader economic slowdown are likely to have on total consumption/consumer spending and the global apparel industry. Moreover, people are just not going out to shop for luxury or even basic apparel products. The company has temporarily shuttered stores in the US and Canada which is further impacting the company’s performance. L Brands also withdrew its earnings guidance provided after the release of its Q4 results (ending January), citing uncertainty relating to the potential impacts of COVID-19 on the company’s business operations – including its duration and its impact on the overall demand for merchandise.

If history repeats itself, L Brands’ stock could potentially gain 100%. But the actual gain and its timing, hinges on the broader containment of the coronavirus spread – our dashboard forecasting US COVID-19 cases with cross-country comparisons analyses expected recovery time-frames and possible spread. More importantly, the weak performance of L Brands’ Victoria Secret arm over recent years has left the company in a financially precarious situation. The cash it receives from Sycamore Partners for the 55% stake in Victoria’s Secret will prove critical for the company to stay afloat in the turbulent months expected to come. And even that might not be enough if the crisis drags on for longer than a few months.

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L Brands Stock versus S&P 500 Over 2020 Coronavirus/Oil Price War Crisis

  • L Brands’ stock declined by about 43% between 8th March 2020 and 24th March 2020 (vs. an 18% decline in the S&P 500), and the stock is down almost 44% since February 1 after the WHO declared a global health emergency in light of the coronavirus spread (vs. about 27% decline in the S&P 500 since then).

 

L Brands stock versus the S&P 500 During 2007-08 Financial Crisis

  • Drawing lessons from the 2008 financial crisis, we see L Brands stock declined from levels of around $10 in October 2007 (the pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out). Implying L Brands stock lost as much as 64% from its approximate pre-crisis peak.
  • This marked a steeper decline than the broader S&P, which fell by as much as 51%.
  • However, the stock recovered strongly, rising by 158% between March 2009 and January 2010. In comparison, the S&P rose by about 48% over the same period.

 

Conclusion:

While L Brands’ stock has declined due to the Coronavirus crisis, going by trends seen during the 2008 slowdown, it’s possible that it could bounce back strongly and potentially outperform as the crisis winds down. However, investors will be watching the company’s cash situation closely when the company reports its Q1 results in late May. We also summarize key metrics that point to the company’s solvency in our dashboard comparing L Brands Stock with the S&P 500

Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture and complements our analyses of Coronavirus impact on a diverse set of L Brands’ multinational peers – from Coronavirus and Tapestry to impact on competitor Guess and Coronavirus on URBN stock. The complete set of coronavirus impact and timing analyses is available here.

 

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