L Brands (NYSE:LB) Reversal Gains Momentum

Wall Street Warms Up To L Brands

L Brands (NYSE:LB) emerged as a reversal story over the summer when it reported calendar 2Q earnings. Not only did sales and earnings smash the consensus but news about eCommerce, the intention to spin-off Victoria’s Secret, and an outlook for further improvements point to improving returns for shareholders. Now, a full quarter later and after years of struggle, the signs point to an acceleration of business that has the sell-side analysts warming right up.

L Brands received no less than 6 positive nods from the sell-side community including 4 upgrades and 6 price-target increases. The average rating of the 6 is very bullish with 2 neutral and even those have a bullish bias. Jeffries analysts, for one, have been bearish on L Brands for over four years. The consensus target is near $38 putting the stock at fair value but the four high-side targets have the stock trading between $45 and $60 or 15% to 50% upside. Wells Fargo set the Wall Street high-target of $60 calling the Q3 reports one of the strongest prints its seen all season with beats up and down the statement and across the portfolio.

"BBW earning a multiple as a stand-alone has always been a core tenet to the bull case, but now with what appears to be a 'stable' VS brand in hand, LB shares should also benefit from a higher value of its second concept (we raise our assumption of VS value to ~$3.0B from ~$1.0B implying a ~4.0x EBITDA multiple)," writes analyst Ike Boruchow.

L Brands Q3 Results Accelerate Into The 4th Quarter

L Brands did not just report a fantastic quarter but one so far above the consensus estimates that even the high-price target of $60 seems conservative. The company produced $3.06 billion in revenue for the quarter or up 32% from the prior quarter and 14.2% from the same period last year. The analysts had been expecting YOY revenue growth but closer to 0.2%, a full 1400 basis points lower.

Revenue was driven by a robust increase in comp-store sales that was seen across all channels. Total comps increased by 28% versus the 10.8% expected led by strength in Bath&Body Works. Comps at Bath&Body Works increased by 56% versus the 36% consensus and were compounded by positive results at Victoria's Secret. Sales at Victoria's Secret rose by 4.0% versus the expected 2.5% decline. Sales in both channels were boosted by eCommerce but no details were given in the press release.

L Brands Is On Track To Resume Dividend Payments

L Brands suspended its dividend payments early this year in an effort to control costs, preserve capital and weather the COVID-19 storm and no foul there. Now, L Brands rebound is well underway and it, like some others of late, is in a position to resume distribution payments if not this quarter then very soon. Factors in favor of a dividend include a high cash position worth more than $9 per share, a return to positive cash flow, a relatively low leverage ratio, and the outlook for revenue and earnings growth as the rebound continues.

The Technical Outlook: L Brands Hits A New High

Shares of L Brands are moving higher on the 3Q news and look like the uptrend will continue. The post-earnigns action has the shares up more than 15% and trading at a multi-year high. This move is about more than the COVID-rebound, this is about a company turnaround that is coinciding with a strong economic rebound and it has legs. In the near-term, I would expect to see share prices move sideways in consolidation before moving higher. The consolidation may close the gap formed by the news but there is no guarantee of that. Longer-term, this could double in value either on its own or as two companies.