L Brands, Looking Cheap, May Be a Good Fit Today

Bridget Weishaar: L Brands is currently trading at about a 40% discount to our fair value estimate. We think this valuation coupled with a third-quarter inflection point makes this stock an attractive investment idea.

In our opinion, L Brands possesses a wide economic moat and operates in a space where fit, function, and comfort are more valued than price. We view the anniversary of swim and apparel exits, as well as new bra product introductions in the back half of the year, as likely to provide a boost to both the top line and margin. Furthermore, we see China's long-term potential as capable of catapulting revenue growth back to the 3% to 4% range over time.

Although we acknowledge that a roughly 50% exposure to B and C malls as well as continued strength in lower average unit retail bralette product will continue to weigh on performance, we think this is adequately reflected in our discounted cash flow assumptions. Our five-year outlook calls for low single-digit average annual revenue growth versus the three-year historical average of 5% and operating margin at midteen levels versus high-teen historical performance. Therefore, we see this as a unique opportunity to own a wide-moat company at an attractive discount.