By Robert S. Bacarella | January 7, 2020
L Brands has two of the most world-renowned brands in the retail business, Victoria’s Secret and Bath & Body Works.
Since the beginning of 2018, L Brand’s stock price has declined over 70%–from over $60 per share to less than $18 today. The decline in the stock valuation is primarily due to slumping revenue growth in its Victoria’s Secret division (VC) and some investors’ concerns surrounding the company’s 82-year-old CEO Leslie Wexner’s business/relationship with alleged sex trafficker Jeffery Epstein.
The troubles in the VC division led to a management change in February ‘19, with John Mehas—an experienced luxury brand merchandiser—appointed as CEO. But so far, his efforts have not moved the needle toward improved profitability. And while the appointment of two women directors is a great step for the company to take, the leadership change at the board level also hasn’t yet lead to financial improvements.
The Bath & Body Works segment, on the other hand, continues to be a leading contributor to profits at L Brands, generating approximately 75% of operating profits. This division has grown sales and margins sequentially over the last few years, bolstered by improving comparable same store sales growth and significant digital sales growth.
Recently, an activist hedge fund has built a small stake in L Brands. The activist is urging the company to replace directors and reposition the VC brand to better reflect women’s evolving attitudes towards beauty, diversity and inclusion. Furthermore, the activist is calling for management to split up the company into two stand-alone businesses. The activist and company have agreed to a standstill agreement until February ’20.
With the company’s current stock price of about $18, a forward Price-to-Earnings 8x and dividend yield of 6%, L Brands could be viewed as a bargain. But it’s cheap for a few reasons—its top brand is fading, margins are declining and turnaround efforts are slow to materialize.
A breakup up value of L Brands is estimated to be around $42 per share. However, unlocking this value is dependent on Mr. Wexner, who controls 16% of the shares. Typically, such large insider stakes are often impediments to activists/outside shareholders interest. The company has not elaborated on a succession plan, which would be helpful in understanding the long-term direction of the company.
If you own L Brands shares, now may be a good opportunity to sell shares to offset other portfolio gains in your portfolio…a “weed” that should be pulled. Longer term, L Brands could be a “budding flower “opportunity, especially if the stock price moves through its 200-day moving average ($22) with improving relative strength (price movement) to the overall market.
So, before you attempt to bottom-fish in this stock…remember it’s the second mouse in the trap that gets the cheese!