25% Upside For L Brands’ Stock Post Covid-19?


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 25%, to reach almost $23 once fears surrounding the coronavirus outbreak are put to rest. A detailed comparison of L Brands’ stock 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 In 2008 And Now?

At the end of January the World Health Organization (WHO) declared a global health emergency in light of the coronavirus spread. The rally in the equity market continued until 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 97% over recent weeks (vs. about 43% gain in the S&P 500) to its current level around $18. Despite the recovery, the stock is still down 25% from its pre-covid levels.

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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. Additionally, dwindling consumer demand reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the company’s stock. Further, the ongoing civil unrest in the USA, which is L Brands’ largest revenue segment, has also adversely impacted the demand for the company’s products. Despite the pandemic, L Brands’ Bath & Body Works brand has continued to flourish, with the brand delivering a comparable sales growth of 41% in Q1 2020 (ending April), led by the brand’s digital segment which grew nearly 85%. Bath & Body Works continued to benefit as demand for soaps and sanitizers remained upbeat. Moreover, with things returning to normal and store re-openings, L Brands stock has seen an upward movement of late. In addition to that, a number of mall retailers including RTW Retailwinds, J.Crew, and others, have filed for bankruptcy. This should also support L Brands’ stock price as competition in the mall sector diminishes.

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 -higher than the broader S&P, which fell by about 51%.
  • However, L Brands stock 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 25% to levels near $23 once economic conditions begin to show signs of improvement. 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’ multinational peers – from Coronavirus effect on Skechers to impact on competitor Wolverine and Coronavirus effect on Gap stock. The complete set of coronavirus impact and timing analyses is available here.

 

While L Brands is outperforming, which Dow 30 component stocks have the best chance of beating the benchmark index? Our 3 Dow 30 Stocks To Outperform Dow? looks promising.

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