Bogged down by weak performance of Victoria’s Secret and PINK brands, L Brands, Inc. (LB - Free Report) has been a letdown for investors. Shares of this specialty retailer of women’s intimate and other apparel, beauty and personal care products, home fragrance products and accessories have plummeted 28.5% in a year’s time compared with the Zacks Retail - Apparel And Shoes industry’s decline of 16.5%. Let’s take a look at what’s plaguing this Zacks Rank 4 (Sell) stock.
What’s Giving L Brands a Tough Time?
L Brands’ Victoria’s Secret brand appears to be losing appeal. The brand has been witnessing soft sales for quite some time now, owing to weak traffic. Notably, Victoria’s Secret sales dropped 5% to $2,532 million in the fourth quarter of fiscal 2018. Comparable sales fell 3%, while comparable store sales tumbled 7% in this segment.
L Brands also faces intense competition from American Eagle Outfitters’ Aerie brand and Target’s Auden brand, which have been successful in luring customers away. With more and more consumers preferring online shopping, a host of emerging e-commerce brands are gaining market share and might pose concerns for the Victoria’s Secret brand in the near term.
Victoria’s Secret’s PINK brand also has its share of problems. Its comparable sales declined in low-double digits in the fiscal fourth quarter.
Moreover, L Brands’ gross margin has been contracting year over year for the past few quarters. The company’s balance sheet also does not look healthy owing to a high debt level. As of Feb 2, 2019, the company had $5,739.4 million of long-term debt.
Management provided a soft guidance for first-quarter fiscal 2019. The company anticipates first-quarter comparable sales to fall in low-single digit. Total sales growth is expected to be roughly 1 point lower than comparable sales growth. This can be attributed to loss of La Senza and Henri Bendel sales. For the first quarter, the company expects breakeven earnings compared with 17 cents in the year-ago period.
For fiscal 2019, the company anticipates comps to rise in low-single digits with total sales growth likely to lag comps by about 2 points. Gross margin rate is likely to decrease year over year, mainly due to lower merchandise margins. Further, SG&A costs are expected to increase year over year due to a higher wage rate and inflation-related pressure.
Can the Retailer Make a Comeback?
L Brands remains focused on restructuring the Victoria’s Secret brand, which once led the mass-market lingerie market in the United States. The company plans to shut down 53 Victoria’s Secret stores in fiscal 2019, which failed to generate desired results. Also, the company has relaunched the brand’s swimwear category within less than three years of its exit. With this latest move, the company aims at boosting seasonal sales and store traffic.
Additionally, L Brands concluded the sale of its luxury lingerie brand, La Senza to an affiliate of Regent LP on Jan 6, 2019. This move has been appreciated by investors as the brand failed to live up to expectations. Further, in order to focus on its core product categories, L Brands announced plans to close operations at luxury fashion accessories store, Henri Bendel.
That said, these measures may take a while before they start paying off completely. Hence, it is advisable to steer clear of L Brands as of now.
Apparel Industry – a Brighter Story
Not all industry players are suffering. A few of them have managed to keep afloat on the back of buoyant consumer environment, robust job market and higher disposable income. Players in the industry are coming up with unique products and better bargains to draw customers. Initiatives such as the creation of an omni-channel, loyalty and marketing programs, enhancement of the supply chain and faster delivery options are worth a mention. Further, the industry currently carries a Zacks Industry Rank #100, which places it in the top 39% of more than 250 Zacks industries.
3 Prominent Picks
Below we have zeroed in on three stocks from the industry. These stocks currently carry a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Abercrombie & Fitch Company (ANF - Free Report) carries a Zacks Rank #1 and has a VGM Score of A. The company, which is engaged in the retail of premium, high-quality casual apparel for men, women, and kids, delivered average positive earnings surprise of 88.3% in the trailing four quarters. Further, the company’s shares have rallied approximately 31.2% in the past six months.
Foot Locker (FL - Free Report) carries a Zacks Rank #1 and has a VGM Score of B. The company, which is a retailer of apparel and athletic shoes, came up with average positive earnings surprise of 9.7% for the trailing four quarters. Further, the company’s shares have rallied approximately 31.3% in the past six months.
Boot Barn Holdings (BOOT - Free Report) carries a Zacks Rank #2 and has a VGM Score of A. The company, which offers apparel, western and work-related footwear and accessories for men, women, and kids, delivered average positive earnings surprise of 14.6% for the trailing four quarters. Further, the company’s shares have rallied approximately 24.5% in the past six months.
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