L Brands slides after slashing earnings forecast, PINK brand CEO departure
Shares of L Brands (LB) are sliding after the parent of Victoria’s Secret and Bath & Body Works reported better than expected quarterly earnings and revenue but lowered its profit outlook.
While Jefferies analyst Randal Konik reduced his price target for L Brands and recommended investors sell the shares, his peer at Citi argued that the guidance cut was expected and reiterated a Buy rating on the stock.
Last night, L Brands reported second quarter adjusted earnings per share of 36c and revenue of $2.98B, both above the consensus of 34c and $2.93B, respectively.
The company also lowered its FY18 earnings per share view to $2.45-$2.70 from $2.70-$3.00, with consensus at $2.77.
Additionally, L Brands said second quarter consolidated same-store sales for Stores and Direct were up 3%, while same-store sales for the quarter at Victoria’s Secret were down 1% and up 10% at at Bath & Body Works.
Alongside quarterly results, the company announced that Denise Landman, CEO of Victoria’s Secret PINK, has made the decision to retire at the end of this year.
Amy Hauk, currently president for merchandising and product development of Bath & Body Works, will replace Landman as CEO of Victoria’s Secret PINK.
JEFFERIES SAYS SELL SHARES
In a research note to investors this morning, Jefferies’ Konik lowered his price target for L Brands to $20 from $23 and recommended investors sell the shares.
The analyst argued that the company’s fiscal year earnings guidance cut is still not low enough, and sees PINK on “precipice of massive declines.” Further, the analyst thinks L Brands’ free cash flow guidance is too high as its net debt continues to grow.
The dividend is at risk in the medium-term and the company needs to save cash now “before the next recession,” Konik contended.
The analyst reiterated an Underperform rating on the stock.
Meanwhile, his peer at JPMorgan also lowered his price target for L Brands to $26 from $28.
While the stock was bracing for an earnings forecast reduction, the magnitude of management’s near-term third quarter cut was greater than expected, calling for break-even earnings at the low-end, the first time in more than a decade, analyst Matthew Boss contended.
He reiterated a Neutral rating on the shares. Voicing a similar opinion, Wells Fargo analyst Ike Boruchow lowered his price target for L Brands to $30 from $42 and kept a Market Perform rating on the shares as the core Victoria’s Secret concept continues to struggle.
Pointing out that the second quarter results “raised a number of red flags,” including “severe” margin contraction, “bloated” inventory, Bath & Body Works returning to margin contraction and issues at PINK, Nomura Instinet analyst Simeon Siegel reiterated a Neutral rating and $31 price target on L Brands’ shares.
CITI SAYS RISK/REWARD STILL ATTRACTIVE
Still bullish on the stock, Citi analyst Paul Lejuez told investors that while the turnaround path for Victoria’s Secret “remains unclear,” the market expected last night’s fiscal 2018 guidance cut.
With a 7.5% dividend yield, the stock’s risk/reward is attractive, particularly given actions by management that suggest “they have more than enough liquidity to continue funding the dividend,” Lejuez argued.
The analyst reiterated a Buy rating on the shares and said he views the dividend as safe.
While lowering her price target for L Brands to $44 from $49, B. Riley FBR analyst Susan Anderson kept a Buy rating on the stock as she believes Bath & Body Works continues to excel and Victoria’s Secret remains a work in progress.
While weaker PINK performance is “disappointing,” the analyst believes management is taking steps to correct lounge performance as well as improve performance in lingerie.
Further, Anderson highlighted that L Brands reiterated its commitment to share repurchases and dividend, and reiterated that the company has substantial liquidity to fund the dividend and other expenditures.
In Thursday’s trading, shares of L Brands have plunged over 12% to $28.50.
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