Bank Of America Calls Foul Ball On L Brands; Sporting Can't Fill Swim/Apparel Gap

Analyst Lorraine Hutchinson downgraded L Brands from Neutral to Underperform, decreasing the price objective from $74.00 to $57.00 due to macro headwinds.

"In recent months, stable sales trends have been eroded by macro weakness, a bevy of changes to Victoria's Secret's (VS) strategy and the growing popularity of the less-expensive bralette," said Hutchingson.

Heavy Exposure To U.K.

L Brand's own retail stores are limited to the United Kingdom, providing the company with significant exposure to Great Britain during a most uncertain time. "On the international front, the UK is the only country where LB operates its stores; other geographies have led with a focus on beauty and accessories through licenses and wholesale agreements," stated the analyst.

Related Link: Baird's Top Retail Picks Post-Brexit

Tourism risk from recent political turmoil and product issues within the Beauty segment were also factors in the analyst's downgrade. The analyst believes the two issues would "push out the timeline for a significant international acceleration."

‘Sport Business Not Enough To Fill Swim/Apparel Gap'

Victoria Secret recently exited the swimsuit industry, resulting in a $525 million revenue decline, which won't be completely filled by the company's focus on athletic apparel. "We don't think [the swimsuit exit] can be replaced with a focus on athletic apparel and selling more bras," said Hutchinson.

Other changes in Victoria Secret include:

Rise Of Bralettes

• Organizational restructuring
• The phase-out of its catalog
• The elimination of direct-mail couponing

Among the above changes, Hutchinson was mainly concerned about the elimination of promotions and catalogs "at a time when core lingerie is slowing due to macro pressures and deflationary product trends like bralettes." The new, cheaper bralettes are half as expensive as traditional bras and have emerged as a trend for younger customers, according to the analyst.

At time of writing, L Brands was down 0.51 percent on the day, trading at $64.93.