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What To Make Of L Brands' Q3, Leadership Change, Dividend Reduction

November 20, 2018 3:20 pm
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L Brands Inc (NYSE:LB), the parent company of multiple brands including Victoria's Secret and Bath & Body Works, reported a top- and bottom-line beat in its third-quarter results but also announced a 50-percent reduction in its dividend and named John Mehas as the new CEO of Victoria's Secret.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

  • UBS' Jay Sole maintains a Neutral rating on L Brands with a price target lifted from $31 to $34.
  • Credit Suisse's Michael Binetti maintains at Neutral, unchanged $36 price target.
  • Wells Fargo's Ike Boruchow maintains at Outperform, unchanged $55 price target.
  • MKM Partners' Roxanne Meyer maintains at Neutral, unchanged $34 fair value estimate.
  • Deutsche Bank's Paul Trussell maintains at Buy, unchanged $40 price target.

Shares of L Brands were trading lower by more than 15 percent to $29.07.

UBS: 'Hard Decisions' Aren't Sufficient

L Brands' decision to slash its dividend and hire a new CEO for Victoria's Secret signals management is willing to make" hard decisions" to improve the company, Sole said in a note. However, the "lackluster" third-quarter print and in-line fourth-quarter guidance likely implies Victoria's Secret is undergoing a brand problem and product issues.

Credit Suisse: Coach Style Recovery Needed

L Brands' same-store sales fell 2 percent while merchandise margins fell "significantly" with key categories like Sports Bras falling, Binetti said. Management's guidance for merchandise margins falling 200 basis points or more likely signals the core Victoria's Secret and Pink brands are "far from turning a corner."

Binetti thinks L Brands needs to follow a "Coach-2014-esque retrenchment" in which same-store sales and margins "go a lot lower" before they can improve. The company likely lacks a gameplan, however, especially after freeing up capital from the dividend reduction.

Related Link: Victoria's Secret Is Dragging On L Brands, Analysts Say After Q2 Print

Wells Fargo: 5 Bullish Takeaways

L Brands' report includes five favorable takeaways that support a bullish stance on the stock, Boruchow said.

  • Management lifted its guidance for the first time in 18 months.
  • Mehas' appointment at Victoria's Secret is the right choice after years of underperformance.
  • Victoria's Secret is looking to recapture the $525 million swim category business at discontinued two years ago.
  • Management hinted it can bring in real estate changes and international deals to boost profitability.
  • The dividend reduction is necessary to free up cash and still stands at a "healthy" 3.5 percent yield.

MKM Partners: Maybe The Start Of LB 2.0

L Brands started "shaking things up" in early 2016 but hasn't introduced any new changes until now, Meyer said. In fact, management foreshadowed the possibility of more changes to come.

While change can be good or bad, the roadmap is not yet clear and the company faces the potential of more disruptions. It may be soon seen if L Brands may be "making sexy great again" and it can transform into "L Brands 2.0."

Deutsche Bank: Patience Needed

Patience is needed as management started taking the right moves to bolster the business and stabilize declining EBIT, Trussell said.

Photo by WestportWiki/Wikimedia. 

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