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L Brands Inc. stock soared more than 34.1% in Wednesday trading after the company recommitted to separating Victoria’s Secret and Bath & Body Works into standalone companies.
In after-hours Tuesday, the company also said it would cut the headcount at its corporate headquarters by 15%, or 850 workers; expects $400 million in annualized cost reductions; and is working to reduce operating losses overseas through lease negotiations and other tactics.
L Brands LB, +34.72% gave a preliminary look at second-quarter earnings, with sales at Bath & Body Works expected to rise 10% and Victoria’s Secret sales expected to fall 40%. Total net sales are expected to be down 20% year-over-year, better than the company and the Street expected.
The FactSet consensus is for second-quarter sales of $2.14 billion, down 26.4% versus 2019. L Brands is scheduled to announced second-quarter earnings on August 19.
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L Brands had a cash balance of more the $2.5 billion as of July 24 with nothing drawn from its $1 billion asset-backed loan facility.
“As evidenced by strong results, Bath & Body Works remains one of the best stories in consumer/ retail,” wrote KeyBanc Capital Markets analysts in note. “Unlike at the beginning of the pandemic (when soaps and sanitizers outperformed), Bath & Body Works’ strong sales results are being driven across its product suite.”
KeyBanc rates L Brands shares overweight and raised its price target by $3 to $28.
JPMorgan has grown more upbeat. Analysts there upgraded L Brands to overweight from neutral and raised their price target to $32 from $14.
“[W]e see the Bath & Body Works concept (comprising > 80% of consolidated L Brands EBITDA) bolstered multi-year post COVID-19 with accelerating health, beauty, and home trends and high-teens operating margins driving a sustainable double-digit stand-alone bottom-line growth profile,” JP Morgan said.
L Brands had reached an agreement with private-equity firm Sycamore Partners to sell a 55% stake in Victoria’s Secret. The plan was to spin off Victoria’s Secret and run Bath & Body Works as a separate, publicly-traded company.
After the onset of the coronavirus pandemic, the agreement with Sycamore fell apart.
Analysts at MKM Partners say the latest announcement demonstrates that Bath & Body Works is “among the strongest in the retail sector as it benefits from the strength of its categories in a COVID environment.”
Moreover, analysts are “encouraged” by the improvements in Victoria’s Secret’s fundamentals.
Still, MKM rates L Brands stock neutral. Analysts raised their fair value estimate to $22 from $11.
“What keeps us on the sidelines is still the overhang of a clean Victoria’s Secret separation in a tough retail landscape and in light of the overhang of the pandemic,” MKM’s Roxanne Meyer wrote.
“While we may be more encouraged that the wheels are in motion for a separation, with L Brands likely close to hiring advisors to (ideally) find a buyer for Victoria’s Secret, a transaction may be unlikely until next year, which means there’s still a ‘show me’ element in 4Q and puts Bath & Body Works on the hook for any sharp deterioration in Victoria’s Secret performance should the pandemic worsen in 2H.”
Wedbush analysts are also cautious about a turnaround at Victoria’s Secret.
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“The inventory management is necessary given the current health of the business,” analysts led by Jen Redding said. “Still, the product and imaging require a revival to provide the gasoline for a necessary fire due at Vicky’s.”
Wedbush rates L Brands stock neutral with a $20 price target, up from $12.
L Brands shares have rallied 42% for the year to date while the S&P 500 index SPX, +0.76% is up 0.4% for the period.
