L Brands Exhibits Operational Strength: Should You Hold?

We believe that L Brands, Inc.’s (NYSE:LB) sustained focus on cost containment, inventory management, merchandise, and speed-to-market initiatives has kept it afloat in a soft consumer environment. This is evident from the Columbus, OH-based company’s better-than-expected comparable store-sales (comps) performance in June.

L Brands continues to revamp its business by improving store experience, localizing assortments and enhancing its direct business. We believe these measures will help it to generate incremental sales and increase store transactions through a higher conversion rate. Also, the company is repositioning its La Senza brand by focusing on the younger generation and providing fashionable assortments at a reasonable price.

As a leader in the specialty lingerie and personal care market, we expect that the company’s innovation in merchandise and exclusive assortments will remain popular among consumers and set it apart from its peers. Also, this specialty retailer, with its operational efficiencies as well as new and innovative assortments remains well positioned to capitalize on the same. Apart from this, L Brands’ foray into international markets is likely to provide long-term growth opportunities and help generate higher sales volumes.

These find reflection in the company’s first-quarter fiscal 2016 results, wherein it posted the third straight quarter of positive earnings surprise, backed by higher sales.

Despite these positives, the competitive retail landscape and short-term challenges faced by the company such as foreign currency headwinds cannot be ignored. Earnings per share during the first quarter declined 3.3% year over year. All these factors compelled management to provide a subdued earnings outlook for the second quarter and fiscal 2016.

Management lowered its fiscal 2016 earnings projection to the band of $3.60–$3.80 per share, from the previous guidance of $3.90–$4.10. On the other hand, the company expects fiscal second-quarter earnings in the range of 50–60 cents per share.

The Zacks Consensus Estimate of $3.70 and $3.96 for fiscal 2016 and fiscal 2017 has dropped 39 cents and 52 cents, respectively, over the past 90 days. Moreover, the Zacks Consensus Estimate for the second quarter has decreased 14 cents to 56 cents over the same time frame. However, of late, estimates have been stable.

Given the pros and cons embedded, L Brands currently carries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Some better-ranked stocks in the retail space include Christopher & Banks Corporation (NYSE:CBK) , Burlington Stores, Inc (NYSE:BURL) , both sporting a Zacks Rank #1 (Strong Buy) and American Eagle Outfitters, Inc. (NYSE:AEO) , carrying a Zacks Rank #2 (Buy).