Victoria's Secret Is Dragging On L Brands, Analysts Say After Q2 Print

L Brands Inc LB may have beaten estimates in its second-quarter report Wednesday, but shares are still reeling after the retailer cut its 2018 EPS estimate. The company's flagship Victoria's Secret appears to be stuck in its ways and struggling with a changing fashion consumer landscape.

Analysts Weigh In

• Credit Suisse analyst Michael Binetti maintained a Neutral rating on L Brands and lowered the price target from $35 to $31.
• Bank Of America Merrill Lynch analyst Lorraine Hutchinson reiterated an Underperform and lowered the price target from $29 to $26.
• UBS analyst Jay Sole maintained a Neutral rating and lowered the price target from $32 to $31.
• Bernstein analyst Jamie Merriman maintained an Outperform and lowered the price target from $47 to $44.

The Thesis

Victoria’s Secret has suffered quite the fall from grace. The brand's issues may now hinge on Pink, Credit Suisse's Binetti said in a note. It was announced this week that Pink CEO Denise Landman will retire at the end of the year.

“We fear VS’ ongoing brand issues are radiating to Pink, where LB is stepping up promos to support sales,” the analyst said. 

Amy Hauk, Bath & Body Works' president of product development, is set to replace Landman as Pink CEO, creating some transition risk, Binetti said. 

“With every quarter that goes by, the VS problems seem more broad-based and we just don’t see LB articulating an aggressive enough strategic shift to address changing competitive dynamics." 

Pink generates 23 percent of L Brands' revenue and powered most of Victoria’s Secret’s 2015 and 2016 growth, said Bank of America's Hutchinson. The brand remained strong until the 2017 holiday season, she said. 

“Since then, struggles with lounge have caused sales and margins to soften." 

KeyBanc Capital Markets analyst Edward Yruma said the weakness at Pink spells even more trouble for L Brands. 

"We note that PINK has been an outsized driver of overall growth in recent years, and deteriorating performance could cause a more prolonged period of weakness for LB," the analyst said. 
UBS analyst Sole said L Brands is an inexpensive stock and Victoria's Secret is "a great brand going through tough times." 

The company needs a catalyst, he said. 

“We think VS has a brand image problem, but LB hasn’t indicated it’s willing to evolve. Until it does, we see material risk its financial performance deteriorates further." 

If Victoria’s Secret's messaging does in fact change, it could serve as the catalyst that Sole said could cause him to reconsider his stance on the stock. 

Bernstein's Merriman said the L Brands story is unchanged: Victoria’s Secret disappoints while Bath & Body Works outperforms.

The stock has potential catalysts like the relaunch of products such as Body by Victoria, but that's a 2019 initiative, the analyst said. 

“Until Victoria’s Secret shows some signs of stabilization, we expect the stock to be rangebound in the low $30 range." 

L Brands shares are down 53 percent year-to-date. 

Price Action

L Brands shares were down 11.7 percent at $28.16 near the end of Thursday's trading session. 

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Photo by Samantha Marx/Wikimedia.