L Brands stock surges on Q1 earnings beat, raises outlook

L Brands (LB) stock surged above 10% after the bell as the retailer surprised the street with better-than-expected results for the first quarter powered by a solid performance from the Bath & Body Works. The company also has raised the full-year earnings outlook fuelling the increase in stock price.

The stock earlier today touched a new 52-week low of $21.53 as investors were worried that the retailer’s earnings could be impacted akin to its peers due to falling traffic and seasonality.

Raises 2019 Outlook

L Brands raised the low-end of the EPS outlook for full-year to $2.30-2.60 from prior guidance of $2.20-2.60 provided last quarter. Analysts are expecting EPS of $2.39 for the fiscal 2019 period, which is comfortably in the range provided by the firm.

When it comes to second-quarter outlook, the retailer is expecting EPS of 15-20 cents compared to 23 cents expected by the street.

Q1 Performance

Sales rose modestly to $2.62 billion and EPS came in at $0.14 per share primarily aided by a strong performance from the Bath & Body Works segment. Last quarter, the company had guided Q1 earnings would breakeven.

Analysts were expecting sales of $2.56 billion and earnings breakeven compared to 17 cents reported in the prior year. The company was able to surpass estimates on both the top and bottom line which is good news for investors.

Same-store sales is a key metric watched by the street. L Brands reported flat comp-store sales, which topped 1.3% decline forecasted by the street. As expected, Victoria’s Secret comp-sales dwindled 5% which was offset by strong 13% growth from the Bath & Body Works.

Victoria’s Secret: Will it rebound?

In January, La Senza was sold to an affiliate of private equity firm Regent LP and closed all Henri Bendel stores and the website as the retailer wants to focus on its core segments which need closer attention now.

Victoria’s Secret’s poor performance has been a concern for the firm which has been dragging the results. The lingerie division has been witnessing sales decline for the past three quarters.

Sales per average square foot in the US has decreased above 10% to $757 in 2018, compared to $844 in 2016, and dropped above 3% over 2017 level of $784. The drop in sales could be attributed to lower mall traffic, failure to upgrade the merchandise and increasing competition from Aerie, owned by American Eagle Outfitters (AEO), Adore Me, Lively, and ThirdLove.

In November 2018, John Mehas took over as CEO of Victoria’s Secret who was brought in to turnaround the lingerie brand. However, the multitude of strategies implemented by Mehas could not arrest the decline in sales.

With tough macros expected for 2019 for the entire sector, Mehas and his team have the task cut out to bring back the mojo to the lingerie brand. It has to do some serious soul-searching to tackle competition, improve sales and marketing efforts attuned to current trends, refresh the merchandise based on demand to report positive sales growth.

Bath & Body Works: L Brands’ Savior

Bath & Body Works has been the savior for L Brands, which has grown reasonably well compared to the lingerie brand. The division reported double-digit comp sales growth in the past three quarters.

Sales per average square foot in the US has surged 7.2% at the end of last year to $891 compared to $831 in 2016 and rose 5.7% over 2017 level of $844. The decent growth in the division still could not offset the drop in Victoria’s Secret sales.

L Brands could not pivot on one brand to offset low-performing brand for a long period of time.

Peer Performance

J.C. Penney, Kohl’s, Nordstrom, Lowe’s and Home Depot this week reported disappointing comp-store sales due to lower mall traffic, increased competition from e-commerce players like Amazon, and changing consumer preferences.

In addition, investors are worried about the increased tariffs on goods imported from China, which could further dent their earnings which are already on the downhill.

Bottom Line

It would be interesting to see how activist investor Barington Capital Group is going to react post today’s earnings. Since Victoria’s Secret is showing no signs of a rebound, 2019 is going to be a crucial year for Les Wexner and John Mehas to come up with a solid execution plan for the lingerie brand’s turnaround.

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