L Brands (NYSE: LB), a retailer of women’s clothing, personal care and intimate beauty products, is expected to release fourth quarter results on Wednesday, February 24. In the coming fourth quarter, we expect the company to likely see earnings beat consensus and earnings align. L Brands has tried to balance two brands with vastly different trajectories – the struggling Victoria’s Secret business and the rapidly growing Bath & Body Works segment. While the company plans to operate the Bath & Body Works brand as a pure-play public company, it will also divest its Victoria’s Secret business around August. In the third quarter, the company’s revenue grew 14% year-over-year, driven by increased demand for soap, sanitizer and surging digital sales. We expect this trend to continue in the fourth quarter as well.
Our forecast indicates that L Brands’ valuation is around $ 52 a share, which is 3% above the current market price of around $ 51. Watch our interactive dashboard analysis at L Brands pre-wins: What to expect in the fourth quarter? for more details.
(1) Revenue expected in line with consensus estimates
Trefis estimates LB’s fourth-quarter revenue at around $ 4.9 billion, in line with consensus estimates. In the first nine months, Bath & Body Works indeed experienced tremendous growth, with revenues growing 19% year-on-year and comp sales increasing 45%. However, Victoria’s Secret revenue was down 34% year-over-year and comp sales fell 13% during the same period. The company has benefited from the growth in online sales amid the pandemic. In fact, Victoria’s Secret Direct (a mail order and e-commerce branch of the brand) saw its sales grow 42% in the third quarter, despite the decline in physical sales (although that was not enough to counter his physical decline at retail.). A private equity firm Sycamore Partners came to the rescue with an offer to take a controlling stake in the struggling lingerie chain in early 2020, but the relief was short lived as the deal collapsed in the face of the spread of the coronavirus.
2) EPS likely to be slightly higher than consensus estimates
LB’s fourth quarter earnings per share (EPS) is expected to be $ 2.96 per Trefis analysis, slightly above the consensus estimate of $ 2.90. The company increased its earnings per share forecast for the fourth quarter to $ 2.96 to $ 3.00, an increase of 5.4% to 11.1% from the previous forecast from $ 2.70 to 2 , $ 80. L Brands expects to achieve $ 400 million in cost savings per year for 2020, half of which is expected to occur in the second half of the year. In addition, it closed 239 Victoria’s Secret stores in the United States and Canada in 2020 and reduced overheads in China. The retailer has reorganized its line of credit, suspended rent and dividend payments, and cut capital spending in an effort to save money during the pandemic.
For the full year, we expect LB’s adjusted net margin to drop from 4.9% in 2019 to 7.8% in 2020. This, coupled with a 6% year-on-year decline L Brands revenue, could lead to a $ 290 million year-over-year increase in adjusted net income to $ 927 million in 2020. All of this, leading to a possible increase in Adjusted EPS from $ 2.31 in 2019 to around $ 3.36 in 2019. 2020.
(3) Estimate of the share price above the current market price
Through our L Brands valuation, with an estimated adjusted earnings per share (EPS) of around $ 3.36 and a P / E multiple of 15.6x in 2020, that translates to a price of around $ 52, which is 3% higher than the current market price of about 51 USD.
While shares of L Brands may trade higher after the fourth quarter release, 2020 has created numerous price discontinuities that may provide some interesting trading opportunities. For example, you will be surprised at how counterintuitive stock valuation is TJX vs. ABIOMED.
See everything Trefis price estimates and Download Trefis data here
What is behind Trefis? Find out how it fuels a new collaboration and why Financial directors and finance teams | Product, R&D and marketing teams