L Brands Poised on Operational Strength: Should You Hold?

We believe that L Brands, Inc.’s LB sustained focus on cost containment, inventory management, merchandise and speed-to-market initiatives have kept it afloat in a soft consumer environment. This is reflected by the company’s comparable-store sales (comps) performance in February. Comps for the month rose 5% year over year, taking a sharp “U” turn from the 2% decline recorded in January.

L Brands commands a market-leading position in the lingerie, personal care and beauty segments. We think that the company’s innovation in merchandise and exclusive assortments remains popular among consumers, setting it apart from peers. Further, L Brands’ foray into international markets is likely to offer long-term growth opportunities as these stores continue to perform well in addition to generating increased sales volumes.

Further, the company, with its operational efficiencies as well as new and innovative assortments, remains well positioned to capitalize on the same. This is evident from L Brands’ positive earnings surprise history. In the trailing seven quarters, the company surpassed the Zacks Consensus Estimate by an average of 3.1%.

In the last concluded quarter (fourth-quarter fiscal 2015), L Brands posted earnings of $2.15 per share that beat the Zacks Consensus Estimate of $2.05. Also, the bottom line advanced 14% year over year, backed by higher sales and improved margins. Net sales increased by 8% and also outpaced the Zacks Consensus Estimate.

However, the Columbus, OH-based company provided its earnings per share guidance below the consensus estimate that witnessed a downward revision. L Brands now envisions earnings in the band of 50–55 cents a share for the first quarter and between $3.90 and $4.10 for fiscal 2016. The Zacks Consensus Estimate for the first quarter and the fiscal year currently stands at 57 cents and $4.11, respectively, declining 9 cents and 10 cents, over the past 60 days.  Management also hinted that foreign currency headwinds are likely to impact the company’s results.

Nevertheless, L Brands continues to revamp its business by improving store experience, localizing assortments and enhancing its direct business. We believe that these measures will help the company to generate incremental sales and increase store transactions through a higher conversion rate.

Given the pros and cons embedded in the stock, L Brands currently carries a Zacks Rank #3 (Hold). Well, you can hold the stock for the near term, unless an unprecedented event compels a downgrade in the Zacks Rank.

Stocks that Warrant a Look

Investors interested in the retail space may consider better-ranked stocks such as American Eagle Outfitters, Inc. AEO and Express Inc. EXPR, both flaunting a Zacks Rank #1 (Strong Buy), and Abercrombie & Fitch Co. ANF, carrying a Zacks Rank #2 (Buy).

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