We believe there may be better places for your money than L Brands’ stock(NYSE: LB) at the present time. L Brands currently trades at $33 and it has gained 85% in value so far this year. It traded at a pre-Covid high of $24 in February, and it is 35% above that level now. Also, the stock has gained 260% since its March lows of $9. Notably, L Brands’ stock price has gained in recent weeks due to the strong performance of its digital channel as well the company’s decision to restructure its Victoria’s Secret business, with the company closing down more than 200 stores in YTD 2020. Having said that, we believe that the stock has little room left for growth in the near future. Our conclusion is based on our detailed analysis of L Brand’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system
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In contrast, here’s how L Brands and the broader market performed during the 2007/2008 crisis
2007-08 Financial Crisis
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
L Brands vs S&P 500 Performance Over 2007-08 Financial Crisis
L Brands stock declined from levels of around $10 in September 2007 (pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out), implying L Brands stock lost 64% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $10 in early 2010, rising by 158% between March 2009 and January 2010. In comparison, the S&P 500 declined by 51% before recovering by 48% between March 2009 and January 2010.
L Brands Fundamentals
L Brands’ revenues grew 6% from $12.1 billion in 2015 to $12.9 billion in 2019, primarily led by strong performance in the Bath & Body Works segment. However, despite achieving steady growth in revenues, the company’s profits plunged, with earnings per share falling from $4.30 per share in 2015 to -$1.33 in 2019. Moreover, the company’s Q2 2020 revenues were 42% below the level seen a year ago. Nevertheless, the EPS figure for the quarter improved from -$1.25 in Q2 2019 to -$0.18 in Q2 2020.
Does L Brands Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
L Brands’ total debt increased from $5.7 billion in 2015 to $6.7 billion at the end of Q2 2020, while its total cash remained around $2.6 billion over the same period. The company also generated $286 million in cash from its operations in the first half of 2020, and it appears to be in a good position to weather the crisis.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment.
Going by the historical performance and in view of the strong rally in L Brands’ stock since late March, we believe that the stock has little room for growth in the near future.
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