Bank Of America Finds L Brands Attractive At Current Levels

Mall retailer L Brands Inc LB has multiple levers at its disposal to improve the business and add value to investors, according to Bank of America.

The Analyst

Lorraine Hutchinson upgraded L Brands from Neutral to Buy with a price target lifted from $21 to $25.

The Thesis

L Brands' could immediately support earnings if it were to add back a private label swim category at both Victoria's Secret and Pink, Hutchinson wrote in the note. When management decided to exit the category in fiscal 2016 it was dilutive to margins but could now prove to be accretive to margins after VS margins fell from 15.5% to 2.6%. The swim category helps both basket size and traffic and comes with a high level of attachment rate.

Management could also implement broader changes at VS to become more inclusive, the analyst wrote. Management's decision to cancel its annual fashion show is likely to fall short of encouraging Millennials to trust the brand. A revamp or re-launched brand image "could still work" but needs to be done quickly.

Behind the scenes, L Brands may want to diversify its board of directors given an average tenure of 15.5 years with an average age of 69. In fact, the company has among the oldest board members within BofA's coverage universe.

Finally, management could spin its stronger unit Bath & Body Works with 40% of the cash and all of the debt since it is the more profitable unit and can better service debt, the analyst wrote. While management didn't provide any details in this regard it would be consistent with the company's history of spinning out concepts.

Price Action

Shares of L Brands were trading higher by more than 7% at $18.86.

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