L Brands (NYSE: LB), a women’s intimate apparel, personal care, and beauty products retailer, is scheduled to report its fiscal fourth-quarter results on Wednesday, February 24. In the upcoming Q4, we expect the company to likely see earnings beating consensus and revenues coming in line. L Brands has been trying to balance two brands with largely different trajectories – the ailing Victoria’s Secret business and the fast-growing Bath & Body Works segment. While the company is planning to operate Bath & Body Works brand as a pure-play public company, it will also be spinning-off its Victoria’s Secret business somewhere around August. In Q3, the company’s revenues grew 14% y-o-y, driven by increased demand for soap, sanitizer, and soaring digital sales. We expect this trend to continue into Q4 as well.
Our forecast indicates that L Brands’ valuation is around $52 a share, which is 3% higher than the current market price of roughly $51. Look at our interactive dashboard analysis on L Brands’ Pre-Earnings: What To Expect in Q4? for more details.
(1) Revenues expected to be in line with consensus estimates
Trefis estimates LB’s Q4 revenues to be around $4.9 Bil, in line with the consensus estimates. In the first nine months, Bath & Body Works indeed produced explosive growth, with revenues growing by a solid 19% y-o-y and comp sales increasing by 45%. However, Victoria’s Secret revenues declined by 34% y-o-y and comp sales fell by 13% during the same period. The company benefited from growing online sales amidst the pandemic. In fact, Victoria’s Secret Direct (a mail-order and e-commerce branch of the brand) saw sales grow 42% in Q3, despite its brick-and-mortar sales falling (even though this was not enough to counter its physical retail decline). A private equity firm Sycamore Partners came to the rescue with an offer to take a majority stake in the struggling lingerie chain in early 2020, but the relief was short-lived as the deal fell apart in the face of the coronavirus spread.
2) EPS likely to be slightly higher than the consensus estimates
LB’s Q4 earnings per share (EPS) is expected to come at $2.96 per Trefis analysis, marginally higher than the consensus estimate of $2.90. The company boosted its fiscal Q4 earnings per share guidance to between $2.96 and $3.00, an increase of 5.4% to 11.1% over the previous guidance of $2.70 to $2.80. L Brands expects to deliver $400 million in annual cost savings for full-year 2020, half of which are expected to come in the second half of the year. In addition, it has closed 239 Victoria’s Secret shops in the U.S. and Canada in 2020 and is cutting overhead costs in China. The retailer retooled its credit line, suspended rent & dividend payments, and cut down capital expenditures in order to save money during the pandemic.
For the full-year, we expect LB’s adjusted net margin to grow from 4.9% in 2019 to 7.8% in 2020. This coupled with a 6% y-o-y decline in L Brands’ revenues, could lead to a rise of $290 million y-o-y in adjusted net income to $927 million in 2020. All this, resulting in a possible adjusted EPS increase from $2.31 in 2019 to around $3.36 in 2020.
(3) Stock price estimate higher than the current market price
Going by our L Brands’ valuation, with adjusted earnings per share (EPS) estimate of around $3.36 and a P/E multiple of 15.6x in 2020, this translates into a price of roughly $52, which is 3% higher than the current market price of around $51.
While L Brands stock could trade higher post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for TJX vs ABIOMED.