L Brands Slips After Disappointing October Sales Prompt Guidance Cut

Shares of L Brands (LB ) slid in afternoon trading after the owner of the Victoria’s Secret and Bath & Body Works brands reported estimated comparable sales data for the month of October and provided an updated outlook for third quarter earnings that were below consensus estimates.

WHAT’S NEW: After the market close yesterday, L Brands said that October comparable sales are estimated to be up 1% year-over-year, including an anticipated 2% comp decline at Victoria’s Secret and 6% comp rise at Bath & Body Works. In addition, the company lowered its Q3 earnings per share view to about 40c from its previous guidance range of 40c-45c. In Q3 of last year, L Brands reported EPS of 55c. Prior to the update analysts expected the company to report Q3 EPS of 46c.

STREET RESEARCH: Following the news, Mizuho analyst Betty Chen downgraded L Brands to Neutral from Buy and cut her price target on the shares to $70 from $85, saying that the company’s Q3 earnings guidance miss shows the “severity of challenges” that Victoria’s Secret is facing and that L Brands’ outlook is “cloudy.” Chen said her firm now believes that Victoria’s Secret’s beauty repositioning and coupon reductions may take longer than expected. The analyst added that lower merchandise margins led to Q3 EPS guidance that was 13% below Wall Street expectations, placing fiscal 2016 and fiscal 2017 consensus views at risk. Meanwhile, Cowen analyst Oliver Chen maintained an Outperform rating on the stock but cut his price target on the shares to $74 from $83. The analyst said that, given the earnings guidance, gross margin erosion “could have been worse” than expected as management aims to reposition beauty and “strike the right balance” in promos. Chen noted that comps were lower than expected as well. Stifel analyst Richard Jaffe kept a Buy rating on L Brands, saying that the shares should be bought on weakness. Despite near term pressure as the company works through strategic changes in merchandising and promotions initiated at Victoria’s Secret, Jaffe believes that the business fundamentally is “solid” and he has a “favorable” view regarding the company’s long-term outlook. The analyst said that margins at Victoria’s Secret dropped versus last year as a result of increased promotions amid a difficult environment but noted that Bath & Body Works continues to outperform, noting its comp sales increase.