L Brands (LB): Bralette Pricing Pressure Already In Stock, Get Ready For The Turnaround - Oppenheimer

October 7, 2016 9:35 AM EDT
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Price: $72.50 +0.36%

Rating Summary:
    11 Buy, 17 Hold, 2 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 14 | Down: 11 | New: 8
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Oppenheimer analyst, Anna Andreeva, reiterated her Outperform rating on L Brands (NYSE: LB) and cited the company as her top turnaround pick for 2017. Since embarking on category/promo changes at Victoria's Secret in April, sales are better than the conservatively guided range but margins are worse, driven by category exit/trial events (in beauty/sport/lingerie). Estimated at 37% of sales ($2.9B or 23% of total LB mix), VS lingerie declined 3 months this year (including September), raising concerns about the company's ability to maintain dominant market share in this category.

VS's success since the '90s was partially predicated on push-up bras and innovation that followed. The new bralette trend represents first real new category since that time. While late to bralettes (March launch), given fast lead times (2-3 weeks < structured bras), VS is a player that matters.

The rise of bralettes, at ticket prices half those of bras, could translate to deflationary pressures industry-wide assuming some cannibalization for the 15-25 year old core customer. A one-for-one bralette/bra swap = 10% hit to VS bra sales annually.

With merchandise margins "down significantly" last two months, LB is running below guidance. However, better sales are driving improved leverage. Net/net, the analyst believes '16 estimates are likely intact, with potential for upside.

No change to the price target of $90.

For an analyst ratings summary and ratings history on L Brands click here. For more ratings news on L Brands click here.

Shares of L Brands closed at $71.16 yesterday.

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