Victoria's Secret Troubles Are Hurting L Brands

Mizuho Securities downgraded L Brands Inc LB to Neutral from Buy following its third quarter EPS miss and weak outlook, underscoring the severity of challenges facing Victoria’s Secret.

The company now anticipates third quarter EPS of $0.40, relative to guidance of $0.40-$0.45 and the brokerage’s estimate of $0.47. The revised EPS guidance was attributed to lower merchandise margins and places FY 2016 and FY 2017 consensus at risk. The brokerage now projects EPS of $0.41 for the third quarter.

“We now believe VS’ Beauty repositioning and coupon reductions could take longer than expected and creating near-term topline and earnings disruption (exit of non-athletic apparel online, including swim, should negatively impact topline by $525mm),” analyst Betty Chen wrote in a note.

Accordingly, Chen now expects third quarter gross margin decline of at least (260) bp and (180) bp for FY16 and sees VS comps may continue to drop against tough compares for the remainder of FY16.

Chen expects multiple contraction to the 16-18x range given flat to low single-digit comp growth, gross margin declines and questions over management execution.

Chen also trimmed price target on the stock by $15 to $70.

Shares of L Brands closed Monday at $72.19 and was down more than 7.7 percent to $66.71 Tuesday.