Analyst Note| Jaime M. Katz, CFA |
No-moat L Brands reported strong sales for holiday 2020, covering the first nine weeks of its fourth quarter. Bath & Body Works remains a standout with a 17% comparable sales increase, stemming from a 5% in-store rise and a 64% e-commerce increase. Victoria’s Secret continues to struggle, as it printed a 9% comp sales decrease on a 23% in-store sales decline only partially offset by a 24% e-commerce increase. Both segments saw merchandise margin improvement owing to better promotional pricing and inventory management. As a result, we plan to increase our fourth-quarter gross margin estimate to 46% from 39%, although we expect some gains to reverse in 2021 on wage investments and higher shipping costs. We now forecast fourth-quarter EPS near the low end of company guidance of $2.70-$2.80 but materially higher than our prior $1.86 forecast. We plan to raise our fair value estimate by a single-digit clip but still view the stock as overvalued.