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L Brands (LB) Down 24% in 6 Months: Three Factors to Blame


A glimpse of L Brands, Inc.’s LB share price movement reveals that it has plunged roughly 24% in the past six months. The stock has decreased nearly 6.6% in a month, wider than the industry’s decline of 1.2%.So what is behind the debacle? We have tried to ascertain major reasons that can be held responsible for this Zacks Rank # 5 (Strong Sell) stock’s dismal show in the bourses.

Declining Comps

Major chains are grappling with sluggish store and mall traffic as consumers switch to online shopping. L Brands continues to disappoint investors with soft comparable sales (comps) performance so far in the year. This specialty retailer of women’s intimate and other apparel, beauty and personal care products reported 4% drop in comps for the month of August, following declines of 7%, 9%, 7%, 5%, 10%,13% and 4% in July, June, May, April, March, February and January, respectively.

L Brands continues to face short-term challenges due to its decision to exit the swimwear category, which according to analysts has failed to generate desired results. Management expects comps to decline in low-single digits in September. The company projects comps (excluding Victoria's Secret swim and apparel) in the third quarter to be in the range of flat to down low-single digit. For fiscal 2017, the company envisions comps to be down low-to-mid-single digits.

Waning Top & Bottom Lines

L Brands dwindling top and bottom-line results remain the primary concern for investors. A look at the company’s performance in fiscal 2017 unveils that net sales declined 7% and 5% in the first and second quarter, respectively. Maintaining the same chronological order, we note that earnings per share fell 44% and 31%, respectively. Moreover, the second quarter marked the fourth straight when the company’s top line fell short of the Zacks Consensus Estimate.

Management now projects earnings in the band of $3.00-$3.20 per share for fiscal 2017, down from the prior view of $3.10-$3.40 and also well below fiscal 2016 and 2015 earnings of $3.74 and $3.99, respectively. Moreover, the company envisions third-quarter earnings in the range of 25-30 cents, compared with prior-year quarter earnings of 42 cents.

As a result, analysts polled by Zacks have also tweaked their estimates. In the past 30 days, the Zacks Consensus Estimate of $3.14 and $3.18 for fiscal 2017 and 2018 has declined 10 cents and 13 cents, respectively. Moreover, for the third quarter the same has dropped 8 cents to 29 cents.

Gross Margin Continues to Hurt

Gross margin has shown constant deceleration in the past few quarters. In first and second quarters of fiscal 2017, adjusted gross margin contracted 320 and 120 basis points (bps) to 37.1% and 37.3%, respectively primarily due to buying and occupancy expenditure deleverage. We noted that gross margin have contracted 230 bps, 190 bps, 180 bps and 170 bps in the fourth, third, second, and first quarters of fiscal 2016 to 43.3%, 39.7%, 38.5% and 40.3%, respectively. Further, management anticipates gross margin to deteriorate year over year during the third quarter as well as fiscal 2017.

Bottom Line

Undoubtedly, aforementioned factors are enough to unnerve investors. Nevertheless, L Brands continues to revamp business by improving store experience, localizing assortments and enhancing direct business. The company is focusing on cost containment, inventory management, merchandise, and speed-to-market initiatives.

Can’t Get Over Retail? Check These Trending Picks

If you are interested in the retail space you can consider stocks such as G-III Apparel Group, Ltd. GIII flaunting a Zacks Rank #1 (Strong Buy), and The Gap, Inc. GPS and The Children's Place, Inc. PLCE both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel delivered an average positive earnings surprise of 3.5% in the trailing four quarters and has a long-term earnings growth rate of 15%.

Gap delivered an average positive earnings surprise of 9.3% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

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