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L Brands Gets a Rating Upgrade from Wells Fargo

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Wells Fargo upgraded L Brands (LB) to “outperform” from “market perform” on November 12. On the same day, Barclays raised its target price on L Brands to $33.00 from $31.00. L Brands stock closed 1.4% higher on November 12. On a year-to-date basis, L Brands stock has lost 38.5% of its value.

As of November 12,  out of the 28 analysts covering L Brands stock, ~29% recommended a “buy,” 57% recommended a “hold,” and ~14% recommended a “sell” for the stock. Analysts’ 12-month average target price for L Brands stock is $35.58, which reflects a 3.9% downside based on its stock price on November 12.

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Analyzing the upgrade

According to a MarketWatch report, Wells Fargo thinks that L Brands could enter the swimwear category. Wells Fargo analysts think that the swimwear category is a $450 million revenue opportunity. In 2016, L Brands exited the swimwear business. L Brands thought that swimwear was a non-core business. L Brands shifted its focus to the activewear category.

The MarketWatch report quoted Wells Fargo analysts—headed by Ike Boruchow. The analysts said, “Though the negative realities of the swim category remain, management may have underappreciated its value in terms of driving incremental sales in their more core/margin-right categories. Mall traffic tends to surge during seasonal transitions, and swimsuit shopping is the largest manifestation of this trend.”

Victoria’s Secret has been impacted as consumers, especially millennials, move to unstructured bralettes. The success of American Eagle Outfitters’ (AEO) Aerie brand, launched in 2006, bears testimony to the changing preferences. Aerie has roped in plus-sized models. The brand hasn’t been touching up the photos, which has resonated well with customers.

Recently, L Brands reported an 8% increase in sales for the four weeks ending on November 4 to $860.5 million. The comps for the four weeks rose 4%.

For the 13 weeks ending on November 4, L Brands’ sales increased 6% to $2.78 billion, while the comps increased 4% on a year-over-year basis. For the third quarter, L Brands expects to report an adjusted EPS of $0.15. On a reported basis, the EPS is expected to be -$0.17.

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