Victoria's Secret and Bath & Body Works parent company L Brands Inc LB was upgraded by Citi on Monday, with an analyst saying the market's valuation of the retailer is overly bearish.
The Analyst
Citi's Paul Lejuez upgraded L Brands from Neutral to Buy and lowered the price target from $46 to $38.
The Thesis
The market has become so bearish on L Brands that the valuation is "just too cheap to ignore," Lejuez said in a note. (See the analyst's track record here.)
L Brands' situation is not an "all clear," and the company's situation could get worse before it gets better, the analyst said.
The stock has lost almost 50 percent year-to-date for performance reasons, Lejuez said: the Victoria's Secret business is flailing, Pink recently turned negative and Bath & Body Works comps are "likely" to turn negative.
L Brands probably has too many stores, and international expansion has been rocky, he said.
Yet Citi views L Brands as undervalued and is positive on its 7.4-percent dividend yield, Lejuez said.
The market is valuing Victoria's Secret incorrectly at nearly zero, the analyst said. While the brand has weakened in the last two years, a drop in implied market value from $17.7 billion in 2015 to almost nothing is an "overly pessimistic" change in sentiment, Lejuez said.
Steps that L Brands could take to strengthen its business include the following, according to Citi:
- Bringing back Victoria's Secret swimwear.
- "Democratizing" the Victoria's Secret brand.
- Repairing L Brands' U.K. business.
Price Action
L Brands shares were up 3.15 percent at the time of publication Monday at $33.35.
Related Links:
Atlantic Equities Downgrades L Brands to Neutral
L Brands Apr. Comps Flat; Sees Q1 EPS At Lower End Of Previously-Issued $0.15-$0.20 Range
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