Troubled Victoria's Secret Triggers Morgan Stanley's Downgrade Of L Brands

Victoria’s Secret's struggles continue to make L Brands LB a wait-and-see story, according to Morgan Stanley. 

The Analyst 

Morgan Stanley’s Kimberly Greenberger downgraded L Brands from Overweight to Equal-Weight and maintained a $32 price target.

The Thesis

The Victoria’s Secret turnaround is taking longer than originally expected, Greenberger said, adding that she now projects greater risk to 2019 estimates. (See her track record here.)

“LB is a wait-and-see stock, and we struggle to identify a catalyst to take shares higher despite compelling valuation and an 8.5-percent dividend yield,” the analyst said. 

Victoria’s Secret's issues are self-inflicted rather than structural, and improvement may not be forthcoming, Greenberger said. The company’s core challenge lies in rebuilding the active customer file after several disruptive businesses changes that occurred in spring 2016, she said. 

With average spend per customer lower, management is focused on building up the basket size through the sleep and sport categories, the analyst said. To build back the customer file however, Victoria's Secret has used promotions to clear slow-moving styles, which ultimately is weighing on the company’s margins, she said. 

“Additionally, we now expect more significant merchandise margin pressure in 2H18 as VS and PINK likely require greater promotions in order to drive traffic and clear slow-moving goods, in addition to greater buying and occupancy pressure." 

The situation at Victoria's Secret could get worse before it gets better, according to Morgan Stanley. 

Price Action

L Brands shares were down 2.12 percent at $27.65 at the time of publication Friday.

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