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L Brands (LB) Hurt by Soft Victoria's Secret & Pink Brands

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L Brands, Inc. (LB - Free Report) has been reeling under consumers’ changing preferences that continue to impact its Victoria’s Secret lingerie brand. Also, weakness in the Pink brand has added to its woes. The reflection of the same was quite visible in the company’s second-quarter fiscal 2018 results.

Despite reporting better-than-expected earnings, it lowered its fiscal 2018 guidance. However, management is trying all means to bring the company back on the growth trajectory but muted view indicates that it has to put in more efforts to turn things around.

These headwinds were more than enough to hurt investors’ sentiments, which led this Zacks Rank #4 (Sell) stock to nosedive and touch 52-week low of $26.08 on Aug 31. Apparently, shares of this Columbus, OH-based company have declined approximately 29% in the past three months, underperforming the industry and S&P 500’s growth of 5.8% and 5.6%, respectively.



We note that comparable store sales for the Pink brand declined in the mid-single-digit range during the second quarter of fiscal 2018 due to weakness in both lingerie and loungewear. The total PINK merchandise margin rate also declined considerably. Further, management highlighted that Victoria’s Secret’s results came below expectations, with comparable sales falling 1% and lower merchandise margin rate.

Apart from these, the company has been grappling with shrinking gross margin from quite some time now. Gross margin is expected to decline year over year during the fiscal third quarter, owing to a decrease in merchandise margin rate, and buying and occupancy expense deleverage. Also, SG&A costs are anticipated to escalate considerably as a percentage of sales in the fiscal third quarter and likely to increase year over year in fiscal 2018.

Well, all of these compelled management to trim full-year view. L Brands now envisions fiscal 2018 earnings of $2.45-$2.70 per share down from $2.70-$3.00 projected earlier. In the prior year, the company posted earnings of $3.20 per share. For the fiscal third quarter, earnings are projected in the range of breakeven to 5 cents compared with 30 cents registered in the prior-year period.

No wonder, analysts have been tweaking their estimates to align with the company’s dismal projection. As a result, the Zacks Consensus Estimate has been witnessing a downtrend in the past 30 days, clearly indicating that analysts covering the stock are not optimistic about its future performance.

The consensus mark for the fiscal third and fourth quarter declined 12 cents and 17 cents to 4 cents and $1.99, respectively. For fiscal 2018, estimates slid to $2.51 from $2.77 in the aforementioned time frame.

We suggest you avoid L Brands for a while now and not to make any hasty decision solely based on the company’s positive earnings surprise streak. Definitely, the company is counting every step, and its focus on international markets is likely to provide growth opportunities and generate increased sales volumes. Still, it will be prudent to look beyond L Brands.

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Urban Outfitters, Inc. (URBN - Free Report) has pulled off an average positive earnings surprise of 17.7% in the trailing four quarters. It has a long-term earnings growth rate of 12% and a Zacks Rank #1.

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