L Brands (LB) stock surged 7.8% on January 3 as Bank of America (BAC) upgraded it to “buy” from “neutral.” Bank of America also raised the price target for L Brands stock to $25 from $21. The upgraded price target implies a potential upside of about 43% compared to the closing stock price on January 2. L Brands stock shrunk 29.4% in 2019 in contrast to the 28.9% rise in the S&P 500.
Why L Brands stock was upgraded
As per The Fly, Bank of America analyst Lorraine Hutchinson upgraded L Brands stock. She backed her upgrade by its inexpensive valuation, attractive dividend yield, continued strength in the company’s Bath & Body Works business, and the possibility for stabilization of Victoria’s Secret business.
However, BAC does not expect L Brands to revive its Victoria’s Secret business in the near-term. BAC believes that the company’s management should reconsider the brand image and marketing of Victoria’s Secret and try to make it more size-inclusive.
Customers are opting for comfortable intimate apparel by American Eagle Outfitters’ (AEO) Aerie brand and ThirdLove. Also, BAC suggested some other measures to improve Victoria’s Secret business, including bringing back private-label swimwear and a diverse board of directors.
Victoria’s Secret drags down Bath & Body Works
L Brands’ Q3 sales fell 3.5% YoY (year-over-year) to $2.68 billion. It fell short of analysts’ sales prediction of $2.69 billion. The company’s comparable sales fell by 2%. Also, persistent weakness in Victoria’s Secret wiped away the 11.3% growth in the Bath & Body Works’ sales to $1.06 billion. Notably, sales of the Victoria’s Secret fell 7.6% to $1.41 billion.
Poor sales and lower margins dragged down the Q3 adjusted EPS by 87.5% YoY to $0.02. However, earnings were in line with analysts’ expectations. Despite the weak Q3 earnings, the company’s stock surged 8.1% on November 21 as the EPS guidance of $2 for the fourth quarter was higher than analysts’ prediction of $1.98.
Expectations from L Brands’ holiday quarter
Currently, 17 of the 27 analysts covering L Brands stock have a “hold” rating. Six analysts rate the stock a “buy” while four analysts have a “sell” recommendation. The average price target of $20.00.This reflects an upside potential of 6% in the stock over the next 12 months.
Analysts expect the company’s Q4 sales to decline 1.7% to $4.77 billion. Their expectations mainly reflect the impact of lower sales from Victoria’s Secret. They expect Q4 adjusted EPS to fall 7.9% to $1.97. Overall, analysts foresee a 15.6% decline in the company’s fiscal 2019 adjusted EPS to $2.38. Also, they anticipate a 1.9% fall in fiscal 2019 sales to $12.99 billion.
Barington Capital Group gives good advice
L Brands is certainly under pressure to revamp its Victoria’s Secret brand. In March last year, activist investor Barington Capital Group suggested that the company should take corrective measures to improve the performance of Victoria Secret.
Barington Capital also recommended that the company evaluate options to unlock the value of Bath & Body Works. They recommend L Brands do this through its initial public offering or a spin-off of Victoria’s Secret brand. Later, the company reached an agreement with Barington Capital and appointed it as a special advisor.
L Brands will have to accelerate its growth strategies as investors and analysts are getting anxious about Victoria’s Secret’s prospects.