L Brands Analyst Says Strategic Alternatives Won't Save Stock From Further Downside

Victoria's Secret and Bath & Body Works' parent company L Brands Inc LB is reportedly in talks to explore strategic alternatives, but this comes at a time when its core brands are "already broken," according to Jefferies.

The Analyst

Randal Konik maintained an Underperform rating on L Brands with a $14 price target.

The Thesis

If media reports of L Brands seeking strategic alternatives are accurate, it won't be enough to support the stock for five reasons, Konik said in a Sunday note. (See his track record here.) 

First, L Brands' third-quarter report showed that demand at Victoria's Secret/Pink is "non-existent" unless there are compelling promotions, the analyst said. The brands are unlikely to see any successful turnaround, especially against growing competition, he said. 

Second, Bath & Body Works has shown strength lately, but it would be "foolish" to expect momentum to continue, Konik said. Traffic trends at stores are trending at flat to slightly positive, and candle mix sales likely peaked at 50%, which implies minimal room for growth ahead, he said. 

Third, Bath & Body Works and Victoria's Secret are overexposed to structural declines in mall traffic, the analyst said, adding that the two businesses don't have a strong enough business model to survive in an online universe. Even if they are successful online, it won't be enough to offset expectations for hundreds of stores to close, he said. 

Fourth, L Brands' net debt stands at more than $5 billion, while cash on hand as of the third quarter has been halved year-over-year, Konik said. 

Looking forward to the end of 2020, L Brands should report EBITDA of $1.5 billion for the full year, which implies Victoria's Secret losses continue and Bath & Body Works' sales and margins have fallen from peak levels, according to Jefferies. 

Price Action

L Brands shares were trading 3.47% higher at $18.64 at the time of publication. 

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Photo by Samantha Marx via Wikimedia.