COLUMBUS, United States — Shares of L Brands Inc, the parent company of Victoria’s Secret and Bath & Body Works, soared 11 percent pre-market after the company’s better-than-expected performance in the first quarter. Management also boosted the lower end of full-year earnings forecast.
The stock increase is unusual for the the company this year, where shares have declined 16 percent. L Brands is the fourth-worst performer for the year-to-date period in the S&P 500 Retailing Index, behind department stores Macy’s Inc, Nordstrom Inc and Kohl’s Corp.
Given that sentiment was so weak heading into the first-quarter, investors can breathe a sigh of relief, RBC Capital Market’s analyst Kate Fitzsimons wrote, citing the earnings beat, Bath & Body Works momentum, an "on-plan" Victoria’s Secret and the tightened earnings outlook.
“With bloody prints thus far this earnings season including sizable FY guidance cuts out of peers, the raise in the annual guidance and likely conservative 2Q outlook stand out as positives,” she said, acknowledging that the undergarment business “has room for improvement” this year.
Her buy-equivalent rating is supported by the continued outperformance at the soap and candle business, Bath & Body Works, while her sum-of-the-parts valuation shows negative value to Victoria’s Secret.
Elsewhere, Telsey Advisory Group’s Dana Telsey and Deutsche Bank’s Paul Trussell also highlight the strength at Bath & Body Works, and point out that work at Victoria’s Secret is not over, as the unit continues to be a “drag” on results. Trussell looks for “gradual improvement as the year progresses as input from the new CEOs (John Mehas — Victoria’s Secret; Amy Hauk — PINK) will begin in the fall season.” He remains bullish on the stock.
On the other hand, Telsey is keeping her neutral-equivalent rating. She believes that the Victoria’s Secret performance will be what “ultimately drives” the stock and that the first-quarter results at the unit do little to instill confidence in the direction of that business. She’s especially troubled by the low-double digit comparable sales decline at the Pink brand for two consecutive quarters.
Meanwhile, Jefferies analyst Randal Konik remains solidly in the bear camp after last night’s results. Bath & Body Works is still “strong,” but Victoria’s Secret is “collapsing,” he wrote.
“It is our view that Victoria’s Secret will soon generate losses as PINK sales decline and fixed cost deleverage ensues,” Konik said. He doesn’t see the solid results at Bath & Body Works “continuing into perpetuity" and recommends selling L Brands shares on strength. He rates the stock underperform.
By Janet Freund; Editor: Catherine Larkin and Will Daley.