Analyst Downgrade of L Brands (LB), Along With Its Victoria’s Secret Low Sales

By Carrie Williams

analyst-downgrade-of-l-brands-lb-along-with-its-victorias-secret-low-salesL Brands Inc. (NYSE: LB), the popular apparel maker and retailer, had become a part of pop culture thanks to its flagship brand Victoria’s Secret. However, the recent falter in sales of Victoria’s Secret (-2%), which accounts for nearly 70% of revenue or LB caused its shares to slide downwards. Today, Jefferies’ analyst Randal Konik downgraded the company to Underperform and with a price target of $50. This latest price target is a downside of 30% from the stock’s last close price of $65.

L Brands is currently facing challenges from multiple fronts. The slowdown in the US Innerwear Market Growth, increasing competition especially from Aerie brand of American Eagle Outfitters, drops in shopper traffic at malls due to amazon effect, and the current changes in fashion trends resulting in rising popularity of bralettes for natural, attainable looks, has really hit VS hard.

In addition, the elevated inventory and the compressing international op margins due to FX pressures, expense build from taking China in house, and weaker sales volume also poses risk for VS.

Since VS generates most of its revenue from its key category bra (~35%), bralettes seem to be the way forward for invigorating the current sales slump, especially since ~20% penetration is expected for bralettes over the next 2-3 years.

Despite the headwinds, Konik still considers L Brands as a ‘safe haven’ for investors “as reflected in short interest that is near the bottom of the group, at just 4% of the float”. Another silver lining for L Brands was the 6% increase in sales in its brand Bath & Body Works. If L Brands makes a quick turnaround based on the changing trends, there is still a huge potential for upward movement, thanks to the popularity of its brand name.

L Brands full Q3 results are expected to be posted on November 16.

Among analyst the overall consensus rating on the stock is a Moderate Buy with an average price target of $78.17, according to information by TipRanks. The average price target represents an upside of 20.26% from L Brands’ current levels.