Earnings Preview: Keep an eye on outlook when L Brands reports Q1 results

Fashion retailer L Brands (NYSE: LB) is expected to publish first-quarter results Wednesday after the closing bell. The event will be followed closely by investors for updates on the management’s views on the company’s performance in the coming quarters.

Though earnings exceeded the forecasts in recent quarters, unfavorable market conditions and weak demand for the company’s flagship Victoria’s Secret remain a cause for worry. While the lingerie brand struggles to regain the lost glory, the Pink variant is also fast losing its appeal. Some of the measures adopted by the management to counter the slowdown, such as price-cuts and discounts, have turned out to be counterproductive.

The L Brands leadership recently came under pressure from investors who recommended that Victoria’s Secret be spun off, citing its fading brand image and failed merchandising efforts that weigh down on sales. The activist investor also demanded that Bath & Body Works, the sole growth driver currently, be taken public to prevent it from being overshadowed by the underperforming Victoria’s Secret.

Unfavorable market conditions and weak demand for the company’s flagship brand remain a cause for worry

The Columbus, Ohio-based company needs to make efforts to upgrade its brands in line with the new trends in fashion while ensuring that margin growth is sustained. An important component of the tobe-reported quarterly data is the full-year guidance, for it will give an idea as to where the company is headed.

AT THE BOURSES

L Brands shares underperformed the sector so far this year, losing around 15% and slipping to an eight-year low earlier this week. Since last year, they fell about 37%. Though the stock looks like a compelling buy, at just above $20, it will be risky to take the plunge before Wednesday’s announcement, given the long-drawn slump that failed to improve meaningfully when earnings reports were published earlier.

Related: L Brands Q4 2018 Earnings Conference Call Transcript

The market’s general perception is that the management is unlikely to maintain its $2.20-$2.60 per share earnings guidance for 2019. It calls for caution because a downgrade is likely to trigger a selloff.  

FORECAST

Reflecting the pressure on margins, Wall Street watchers expect nil earnings for the first quarter, on a per share basis. The estimate compares to earnings of $0.17 per share in the first quarter of 2018. The bottom-line will be negatively impacted by a 2.6% decline in revenues to $2.56 billion, owing mainly to seasonal factors.

For the fourth quarter, the company had posted flat revenues of $4.9 billion, contrary to the expectations for an increase, as the weak performance of Victoria’s Secret fully offset the positive sales at Bath & Body Works. Though earnings moved up modestly to $2.14 per share, they missed analysts’ estimates.

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