L Brands (NYSE: LB) stock
surged more than 35% on July 29 on news that the company will resume efforts to spin off Victoria’s Secret.
In the announcement, LB added that:
- It would cut headcount at its corporate headquarters by 15%.
- The company is trying to reverse overseas operating losses through lease negotiations and other tactics.
- In Q2, sales at Bath & Body Works are expected to increase 10% and Victoria’s Secret sales are expected to decline 40%.
Three months ago, we took a pessimistic view on LB largely because an agreement to sell a 55% stake in Victoria’s Secret to Sycamore Partners had fallen through.
But this latest news changes LB’s outlook considerably.
Continued Strength in Bath & Body Works
For L Brands, Q1 2020 ended on May 2, 2020. Therefore, much of the quarterly performance was impacted by pandemic-related store closures.
With that context in mind, Bath & Body Works’ 18% yoy decrease in Q1 sales wasn’t so bad – it was certainly much better than the 46% dip seen in the Victoria’s Secret business.
But where Bath & Body Works really shined was online, with 85% yoy growth; L Brands said that “people stocking up on hand sanitizers and scented soaps online” led to the surge in sales.
This online success is nice to see, but LB is still primarily a brick-and-mortar company – and this is a bad time to be a brick-and-mortar retailer. That said, the preliminary look at Q2 earnings showed that Bath & Body Works has been able to return to growth, which bodes well for as long as the pandemic lasts.
Taking Steps to Improve Victoria’s Secret
Victoria’s Secret sales are expected to see only a slight improvement in Q2 compared to Q1 – down 40% yoy in Q2 vs. the 46% yoy drop in Q1.
The aforementioned headcount reduction will lead to healthy annualized savings for LB. And on top of that, the company is planning to close 250 Victoria’s Secret stores in 2020 – with more to come in 2021 and 2022.
Now, ideally, L Brands will be able to find another buyer for Victoria’s Secret and focus fully on Bath & Body Works. But even if LB is forced to hold onto the struggling business for a bit longer, these measures will combine to improve cash flow in the short-term.
2021 Estimates Are All Over The Place
With all the uncertainty swirling around – the pandemic, a possible spin-off, store closures, etc. – there is not much consensus among analysts with 2021 estimates.
- The average 2021 EPS estimate is $1.81 per share, but the lowest estimate is $.04 and the highest is $2.66.
- The average 2021 revenue estimate is $11.81 billion, with a low of $9.62 billion and a high of $13.10 billion.
With a market-cap of less than $8 billion, the average 2021 revenue estimate of $11.81 billion gives L Brands an attractive forward price-to-sales ratio. But these numbers might not mean much if the company looks a lot different in 2021 than it does now.
With uncertainty the only certainty, it’s best to ride the uptrend in LB for as long as it lasts.
LB is Offering an Entry Point
After its big move on July 29, LB consolidated between around $24 and $26 for seven sessions.
But yesterday, shares surged more than 5% on solid volume, closing at $27.49.
Yes, the RSI is well into overbought territory.
And yes, I would have liked to see shares consolidate between $24 and $26 for another two weeks or so.
But the price action is really appealing on LB and you should consider getting in.
The stock is now at 52 week-highs, and the extremely bullish recent action combined with the lack of recent overhead resistance gives shares the potential for a nice leg-up. Not to mention, the 50-day moving average just crossed over the 200-day moving average two weeks ago.
If you buy LB, I’d put a stop-order within 5-10% of your purchase price; LB is a risky long-term proposition, and you want to protect yourself.
The Final Word
LB is not the type of stock you want to sink a lot of money into and tuck away for a few years.
But it deserves your consideration. And if it does continue to surge over the next few weeks, you could always sell enough shares to recoup your initial investment – and be playing with house money on a company with nice long-term upside.
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