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Why Has L Brands Suddenly Fallen Off the Investors Radar?

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“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”- Warren Buffett.

At the moment, the quote fits perfectly for L Brands, Inc. as the company’s near term outlook looks bleak after it reported soft comparable-store sales (comps) for Dec 2016, and subsequently trimmed its fourth-quarter fiscal 2016 earnings projection. Investors need to exercise extreme caution when it comes to the stock as it is unlikely to show any major improvement in the near future.

L Brands has exhibited a bearish run in the past one year plunging roughly 35.5% compared with the Zacks categorized Retail-Apparel/Shoe industry that declined 12.5%. Moreover, the company has a VGM Score of “D”. Let’s delve deeper and try to find out what’s taking this Zacks Rank #5 (Strong Sell) company downhill.

L Brands’ comps for the five-week period ended Dec 31, 2016, edged down 1% after increasing 4%, 1%, 3% and 2% in November, October, September and August, respectively. The company stated that merchandise margin rate fell considerably in December, in comparison with 2015, primarily due to rising promotional expenses as well as a decline in the beauty category. Consequently, the company is repositioning its beauty category.

The company now anticipates Jan 2017 comps to be flat. Further, it has lowered profit outlook for the final quarter of fiscal 2016. Management now projects earnings per share to be at the lower end of its previously provided guidance range of $1.85–$2.00. The competitive retail landscape and short-term challenges, such as foreign currency headwinds, are likely to weigh upon the company’s performance.

Let’s look at L Brands’ earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past seven days, the company’s earnings estimates for fiscal 2016 have declined by 2.2% to $3.60. Further, over the same time frame, its earnings estimates for the fourth quarter have moved down by 9 cents to $1.87.

Due to its exposure to international markets, L Brands remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. An increase in price may have an adverse impact on the demand for the products. Management hinted that foreign currency headwinds are likely to impact the company’s results during fiscal 2016.

Stocks to Consider

Better-ranked stocks worth considering in the retail sector include The Children's Place, Inc. (PLCE - Free Report) , Christopher & Banks Corporation and Tilly's, Inc. (TLYS - Free Report) . All these three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Children's Place have gained more than 25% in the past six months and the company has an impressive long-term earnings growth rate of 10.3%.

Christopher & Banks has an impressive long-term earnings growth rate of 15%.

Tilly's shares have more than doubled in the past six months and has long-term earnings growth rate of 13%.

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