Can L Brands' Stock Reverse The Declining Trend Seen Since Early 2018?
L Brands (NYSE: LB) engages in the retail of women’s intimate and other apparel, personal care, and beauty products. The company’s financial performance over several quarters has been weak – something that led to its decision to shutter all Henri Bendel stores and sell off its La Senza business late last year to focus on its 2 core businesses: Victoria’s Secret and Bath & Body Works. However, with profits remaining elusive, L Brands’ stock has lost more than 50% of its value since the beginning of 2018. Notably, macroeconomic setbacks in some geographies, weak international exchange rates, and reduced tourism in key cities have dampened the company’s total sales.
Trefis highlights the reasons why L Brands’ stock sunk 50% since early 2018 in an interactive dashboard along with our forecast for full-year 2019. You can modify any of our key drivers to gauge the impact of changes on the company. Additionally, you can see all Trefis Consumer Discretionary Data here.
How has L Brands’ Stock Performed With Respect To The Market?
- L Brands’ stock price has declined from over $50 at the beginning of 2018 to less than $24 now. This translates to a decline of roughly 52%.
- On the other hand, the S&P 500 index has remained largely level over this period.
We break down change in L Brands’ stock into 4 factors:
L Brands’ Stock Price = Revenue x Margins x Earnings Multiple / No. of Shares
During the year 2018:
- L Brands’ shares declined primarily due to a decrease in Net Income Margin of 292 bps (almost 3 percentage points).
- The decline in valuation was mitigated partially by an increase in Total Revenue and an increase in the P/E multiple
- L Brands’ revenue growth has decelerated sharply over recent quarters
- After increasing in the first half of 2018, L Brands’ revenue growth decelerated towards the latter half of 2018.
- Victoria’s Secret North America segment was primarily responsible for the slump in revenue growth:
- As of 2018, Victoria Secret contributed more than 55% to total revenues. Victoria Secret’s poor performance has been a drag on the overall results of the company.
- The segment’s revenue declined by 5% in Q4 2018 and this trend continued in Q1 2019, with the revenue going down by another 5%.
- Besides this, there the divestiture of the La Senza and Henri Bendel brands also weighed on the top line.
- At The Same Time, L Brands’ Total Expenses Have Increased
- L Brands total expenses have increased at a faster rate than revenues. Total expenses as % of total revenue have gone up from 82% in Q4 2017 to almost 98% in Q1 2019.
- Higher COGS and SG&A expenses are to blame for weak profitability:
- COGS as % of revenue have increased from 58% in Q4 2017 to almost 65% in Q1 2019 driven by decline in the merchandise margin rate (due to increased promotional activity and store asset impairment charges) along with higher occupancy charges due to investments in store real estate in Greater China).
- SG&A as % of revenue have increased from 38% in Q4 2017 to almost 46% in Q1 2019 mainly due to higher wages, higher selling expenses related to higher sales volumes at Bath & Body Works, and new company-owned stores in Greater China
- Higher Expenses Coupled With Deceleration In Revenue Growth Have Adversely Impacted L Brands’ Bottom Line
- Higher operating expenses coupled with deceleration in revenue growth has led to reduction in L Brands’ EPS from $2.31 in Q4 2017 to $1.94 in Q4 2018, and from $0.17 in Q1 2018 to $0.14 in Q1 2019
- EPS figure in Q4 is substantially higher due to seasonality, as Q4 accounts for about a third of the full-year sales during the holiday season.
- Notably, in Q4 2018, LB recognized a loss of $99 million related to the divestiture of La Senza and Henri Bendel
Conclusion: We Believe That L Brands’ Stock Is Undervalued Based On Our Forecasts For Revenues and Profits In 2019:
- LB recently sold its La Senza business and closed down its Henri Bendel business to focus more on its core categories. The absence of these money-losing businesses should improve the bottom line over coming months
- Moreover, the management is working on ways to improve its Victoria’s Secret business, and substantial changes to the assortment are on the cards
- Based on our forecast, L Brands’ adjusted EPS for fiscal 2019 is likely to be around $2.41. Using this figure with our estimated P/E ratio of 12.2x, this works out to a price estimate of $29 for L Brands’ Stock, which is roughly 20% ahead of the current market price.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.