Though the near term is likely to be rocky as management struggles to right its promotional strategy and product assortment, we think shares are undervalued for long-term investors.
’ fourth-quarter results showed pressure across the board as December mall traffic declines and the exit of swim and apparel at Victoria’s Secret (a 2-point negative impact), resulted in flat comparable sales growth. The decision to drive core bra unit growth through lower average unit retail in sport bras and bralettes resulted in a gross margin decline of 230 basis points to 43.3%. Following this earnings report, we expect to lower our $72 fair value estimate by about 8%-9% to account for near-term headwinds. We still view the shares as undervalued for long-term shareholders but caution that the near term is likely to be rocky as management struggles to right its promotional strategy and product assortment.
Bridget Weishaar is a senior equity analyst for Morningstar.
We continue to think that L Brands has a wide economic moat with brand strength in a category characterized by high levels of consumer brand loyalty and prioritization of quality and fit over price. That said, we have been and remain concerned about execution strategies, specifically promotions and store growth plans. We still believe that the company can return to mid-single-digit top-line growth and maintain midteens operating margin (versus historical high-teens levels to reflect competitive pricing pressures) but that it needs to shift focus to international opportunities and take a more conservative stance on North America real estate to achieve this.
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