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Stock Strategist

Wide-Moat L Brands Is Undervalued

Pricing power of Victoria's Secret and Bath & Body Works is paying off.

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Although  L Brands' (LB) overall second-quarter revenue growth was negatively affected by about a point because of foreign exchange rates, core performance remained on track and roughly in line with our expectations, with comparable sales up 4% versus our 2015 expectation of 3%. Additionally, merchandise margin rates grew significantly at Victoria's Secret Direct and Bath & Body Works North America in July, which we believe contributed to management's second-quarter earnings guidance increase to $0.66-$0.68 per share from $0.60-$0.65. We think this reinforces our wide economic moat rating, as strong brands supported top-line growth and pricing power in what many competitors have deemed a difficult environment for intimates. Our full-year expectations already incorporated a slightly higher profitability level, so we have increased our fair value estimate only by a dollar, to $95 per share. We view the shares as undervalued at current levels.

Second-quarter revenue grew 3% to $2.765 billion on comparable sales growth of 4%. Victoria's Secret comps were up 3%, in line with last year. Bath & Body Works' comparable sales grew 5% in the quarter, ahead of last year's 3% increase. As second-quarter earnings guidance was increased, we now expect operating margins to increase slightly from 14.1% in the prior year's second quarter, putting the company on track to deliver our estimated full-year 30-basis-point expansion to 17.4%. The company expects to report full second-quarter results Aug. 19, and we look forward to further insight from the subsequent conference call.

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Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.