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Bear of the Day: L Brands (LB)

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L Brands, Inc. (LB - Free Report) continues to struggle as its brands are off trend. This Zacks Rank #5 (Strong Sell) is near 5-year lows.

L Brands operates 3,084 stores in the United States, Canada, the United Kingdom and Greater China. Its brands include Victoria's Secret, PINK, Bath & Body Works, La Senza and Henri Bendel.

It also operates e-commerce sites for most of those brands and has 800 additional franchised locations worldwide.

Closing of Henri Bendel

On Sep 13, the company announced it was closing all 23 of its Henri Bendel stores as of January 2019, including its e-commerce site.

Henri Bendel has a long history. It has operated 123 years and sells luxury handbags and accessories.

The flagship store was in New York City with smaller stores in 11 states.

L Brands, which bought the chain in 1985, announced that revenue for the full year would be approximately $85 million with an operating loss of $45 million.

In 2017, L Brands had revenue of $12.6 billion, so you can see that Henri Bendel was really a small portion of the business.

With the stock slumping, this closure was expected to enhance shareholder value but it doesn't address the other problems at the flagship brands of Victoria's Secret and PINK.

Will shareholders even notice it is gone?

Another Beat in the Second Quarter

On Aug 22, L Brands reported its second quarter results and it beat the Zacks Consensus Estimate again, reporting $0.36 versus the consensus of $0.34.

It has an amazing earnings beat record. It hasn't missed in over 5 years.

Comparable sales rose 3% compared to the year ago period.

Cuts Full Year Guidance Again

Why did the shares fall after the earnings beat?

Because L Brands cut full year guidance to $2.45 to $2.70 from its previous guide of $2.70 to $3.00. It was the second guidance cut of the year.

The CEO of PINK also announced her retirement at the end of the year. PINK had been one of the company's most successful brands.

It's hiring for the job internally and she's staying on for the transition, but Wall Street often doesn't like senior management changes.

Analysts Slash Estimates

The analysts have been cutting most of the year and they continued to do so after the second quarter earnings report.

The fiscal 2018 Zacks Consensus Estimate fell to $2.51 from $2.79 over the last 90 days. That's an earnings decline of 21.6% as the company earnings $3.20 in 2017.

2019 estimates have been cut too, with the Zacks Consensus falling to $2.57 from $2.90 over the prior 3 months, but that's at least positive earnings growth of 2.4%.

Will Henri Bendel Closure Provide a Boost?

L Brands is one of the few retailers still reporting monthly comparable sales. August sales rose 1%.

But August is a key back-to-school month.

L Brands is still facing pressure from other lingerie and athleisure retailers such as American Eagle Outfitters (AEO - Free Report) with its Aerie line and Gap's Athleta (GPS - Free Report) and its sport focus.

Both American Eagle and Gap are Zacks Rank #3 (Hold) stocks.

Are the Shares Dirt Cheap?

With the shares still slumping, falling 50% year-to-date and hitting new 5-year lows, could this be a buying opportunity?

L Brands now trades with a forward P/E of 11.8. That's pretty cheap, although Gap's forward P/E is even lower at 10.4.

It continues to pay its dividend, which has gone uncut as the shares have sunk. That is currently yielding a crazy-high 8.1%.

That yield reminds me of Macy's (M - Free Report) when its shares sunk to multi-year lows.

Macy's didn't cut its dividend either and had a yield around the same level when it was at its darkest place.

But with no turnaround plan in place for its flagship brands that face stiff competition, investors may be better off investing in the competition instead.

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