Why L Brands Stock Surged after Lower Q3 Earnings

L Brands (LB) stock surged by 8.1% yesterday after the company’s third-quarter earnings announcement on November 20. L Brands’ adjusted EPS fell 87.5% YoY (year-over-year) to $0.02 but met analysts’ forecast. The company’s fourth-quarter EPS guidance of $2 was better than analysts’ forecast of $1.98 for the holiday quarter.

Why L Brands’ earnings declined

L Brands’ lackluster sales—particularly Victoria’s Secret’s persistently weak sales—and contracting margins hurt its earnings. In the third quarter, the company’s sales fell 3.5% to $2.68 billion, missing analysts’ forecast of $2.69 billion. Its comparable sales (including sales from stores and direct channels) fell 2% YoY. Victoria’s Secret sales fell 7.6% to $1.41 billion, and its comparable sales fell 7%.

Victoria’s Secret has been failing to resonate with customers, mainly those wanting comfortable intimate apparel. Furthermore, it is seen as less size-inclusive than newer brands such as ThirdLove and American Eagle Outfitters’ (AEO) Aerie, which have gained traction among customers.

The company is trying to revive its Victoria’s Secret business by introducing new products, improving its e-commerce capabilities, and marketing. It is investing in the Victoria’s Secret sleep and lounge category to improve its top line.

Meanwhile, Bath & Body Works’ sales grew 11.3% to $1.06 billion, and its comparable sales grew 9%. However, the body and home products line’s strength failed to offset the weak Victoria’s Secret sales.

CEO under pressure

L Brands CEO Leslie H. Wexner has been under pressure for various reasons, in addition to the weak Victoria’s Secret sales. The company’s poor performance in recent quarters, former ties with Jeffrey Epstein, and pressure from activist investor Barington Capital have been some major issues for Wexner. Moreover, L Brands stock has fallen 33.1% this year.

In March, Barington Capital suggested L Brands should spin off Victoria’s Secret or consider an IPO for Bath & Body Works. Barington also indicated that the company should aggressively address Victoria’s Secret’s poor performance and correct merchandising missteps. In April, the company appointed Barington as a special adviser to its board of directors. However, according to Bloomberg, the agreement is due for renewal next February. L Brands may need to quickly revive its intimate apparel chain to avoid further scrutiny by the activist investor.

This year, Macy’s has been one of the weakest stocks in its peer group, falling 50.7%. Yesterday, the company announced weak third-quarter earnings results and lowered its fiscal 2019 outlook. For more information, read Macy’s Stock Falls After Earnings on Weak Outlook.