Wide-Moat L Brands Is Undervalued
Pricing power of Victoria's Secret and Bath & Body Works is paying off.
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.
Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.