L Brands Pops 15% On Stellar 3Q Results; Jefferies Upgrades to Hold

Shares of fashion retailer L Brands surged 14.7% in the extended trading session on Wednesday as the company posted better-than-anticipated results for the third quarter of fiscal 2020 (ended Oct. 31).

The company’s 3Q adjusted EPS surged 55.5% year-over-year to $1.13, driven by a 14.1% rise in sales to $3.06 billion and efficient expense management. Analysts were expecting EPS of $0.09 on revenue of $2.67 billion. L Brands (LB) attributed its impressive results to continued strength in its Bath & Body Works brand and a significant improvement in the performance of Victoria’s Secret.

Overall comparable sales (including direct sales) grew 28%, driven by 56% comps growth for Bath & Body Works while Victoria’s Secret comps increased 4%. The Bath & Body Works brand is experiencing strong demand for its soaps and sanitizers amid the pandemic. The overall comps growth for the Victoria’s Secret brand was driven by higher online sales while store sales continued to be weak. (See LB stock analysis on TipRanks)

Commenting on 4Q, CEO Andrew Meslow stated, “As we head into the holidays, our inventories are well-positioned, and we are encouraged by customers’ early response to our merchandise assortments. However, we are cautious about our ability to exceed last year’s fourth quarter sales and earnings results, given anticipated constraints on store traffic, online fulfillment and shipping capacity, as well as other uncertainties related to the COVID pandemic. We are confident in the strength of our brands and remain focused on execution and delivering the best possible outcome for the fourth quarter.”

Following the earnings release, Jefferies analyst Randal Konik upgraded L Brands to Hold from Sell and increased the price target to $33 from $20. In a research note to investors, Konik said that Victoria’s Secret and Pink brand sales and margins have “collapsed” over the last four years, leaving his bearish thesis “largely played out.”

While the analyst still has concerns about Bath & Body Works, he acknowledges that the pandemic has created “sticky demand” for soaps and sanitizers that can help buoy the business. He also added that the balance sheet and cash flow improvements at L Brands “shouldn’t be ignored.”

Meanwhile, the Street is cautiously optimistic about L Brands. Its Moderate Buy analyst consensus is based on 8 Buys, 8 Holds and 1 Sell. With shares already rising a whopping 86% this year, the average price target of $35.29 indicates an upside potential of 5% in the 12 months ahead.