Why L Brands Stock Could Extend Its 80% Gain Over Recent Months By Another 30%


Based on a comparison of L Brands’ stock (NYSE: LB) trajectory over recent months with that around the 2008 recession, we believe that the stock can potentially gain 30%, to reach almost $22 once fears surrounding the coronavirus outbreak are put to rest. A detailed comparison of L Brand’s performance vis-à-vis the S&P 500 is available in our interactive dashboard analysis, How Did L Brands Stock Fare vs. The S&P 500?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. L Brands stock lost 62% of its value (vs. about a 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 82% over recent weeks (vs. about 34% gain in the S&P 500) to its current level around $17.

 

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The Sharp Movements In L Brands’ Stock Were Triggered By Several Underlying Factors

The decline in L Brands’ stock is understandable, considering the impact that the outbreak and a broader economic slowdown are having on consumer spending and on the global apparel industry in particular. The company’s first-quarter was wiped out due to the outbreak of coronavirus, which has forced people to stay indoors, resulting in a steep decline in the demand for the company’s products. L Brands saw its revenues plunge by 37% y-o-y to $1.6 billion in Q1 2020 (ending April). To make matters worse, Sycamore Partners has decided to terminate the agreement to buy a 55% interest in Victoria’s Secret.

However, L Brands’ Bath & Body Works brand continued to grow – delivering a comparable sales growth of 41%, with the brand’s digital segment achieving revenue growth of nearly 85%. Bath & Body Works continued to benefit as demand for soaps and sanitizers remained upbeat. Moreover, the company’s decision to close around 250 Victoria’s Secrets stores also provided a boost to the company’s stock movement.

 

But How Does The Movement This Time Around Compare With The Trend During The 2008 Downturn?

  • We see L Brands stock declined from levels of around $10 in October 2007 (the pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out) – implying the company’s stock lost as much as 64% from its approximate pre-crisis peak -steeper than the broader S&P, which fell by about 51%.
  • However, L Brands recovered strongly post the 2008 crisis to about $10 in early 2010 – rising by 158% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

 

Will L Brands’ Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that L Brands’ stock fell 62% from the market peak on February 19 to the low on March 23 compared to the 64% decline during the 2008 recession, we believe it can potentially recover by 30% to levels of $22 once economic conditions begin to show signs of improving. This marks a partial recovery to the $24-level the stock was at before the coronavirus outbreak gained global momentum.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture and complements our analyses of Coronavirus impact on a diverse set of L Brands’s multinational peers – from Coronavirus and GES to impact on competitor Columbia Sportswear and Coronavirus on URBN stock. The complete set of coronavirus impact and timing analyses is available here.

 

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