L Brands (NYSE:LB), which owns franchises like Victoria’s Secret, Bath & Body Works, and Pink, has been in a horrible downward spiral this year. The shares have plunged from $60 to $32.
In fact, last week, LB stock fell by another 12%. It seems like the company can’t find any stability.
So why the latest fall in LB stock? Well, the culprit was the company’s June sales results. True, the press release focused on the good parts — that is, net sales for the five weeks ending July 7 rose by 6% to $1.282 billion and comparable sales for the same period increased by 3%.
But keep in mind that these figures actually showed deceleration. More importantly, there was a 1% decline in same-store sales for the Victoria’s Secret chain. This was the case even with heavy discounting and promotions.
In light of all this, Jefferies analyst Randal Konik did not mince words in his assessment, saying “it’s game over.” He pointed out the grim facts of the declines in mall traffic and the lack of pricing power. His target on LB stock: $23. This implies 28% downside.
There are many factors that explain the implosion of LB stock. First of all, the competitive environment has become much more intense. Over the past few years, Silicon Valley VCs have poured money into fast-growing startups like Lively and ThirdLove. These companies do not have the legacy issues of high-cost mall locations and can also be more nimble with designs.
But even old-line companies, such as American Eagle Outfitters (NYSE:AEO), Calvin Klein and J.Crew Factory, have made a play for the market. Oh, and of course, there is Amazon.com (NASDAQ: AMZN), which is getting more aggressive in the apparel market.
Another major issue for LB stock is that the company has continued to focus on its brick-and-mortar business. Note that there are more than 3,000 company-owed stores.
In other words, given the costs of operating these locations, there isn’t as many resources and managerial focus for the digital platforms.
LB Stock and the Innovation Issues
The CEO and founder of L Brands, Leslie Wexner (who is 80 years old), is a legend in the retail business. Since launching the company in 1963, he has created an empire, with $12 billion in annual sales and more than 80,000 employees.
Yet it does seem like he is out-of-step with the changing attitudes and preferences of consumers. Let’s face it, the marketing strategy is generally about highlighting super models — which probably gets the interest of males.
But according to Jane Hali, who is the CEO of Jane Hali & Associates LLC, in an interview with the Wall Street Journal: “Victoria’s Secret just didn’t get the memo that we’re talking about bodies of all sizes and inclusiveness.”
Besides, Wexner has missed out on some secular changes in the apparel market, such as with the athleisure movement. The result is that operators like Lululemon Athletica (NASDAQ:LULU) and Nike (NYSE:NKE) have taken the lion share of the opportunity.
Bottom Line on LB Stock
Now there are some positives with LB stock. Note that the forward price-to-earnings ratio is at a mere 11X. What’s more, the dividend yield is 6.5% — which is one of the highest yields for larger cap companies.
However, a low valuation can last for a long time –- especially if there are few catalysts for growth. And unfortunately, this appears to be the case with LB stock. The company’s brands are losing their relevance and there remains the high costs of the brick-and-mortar footprint.
So for now, there should be no rush to pick up LB stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
