L Brands Inc. is not getting any support from Bank of America Merrill Lynch analyst Lorraine Hutchinson, who downgraded the company to underperform and cut her price target to $57 from $74.
An underperform rating is basically telling investors to sell the stock, but the market reaction was muted as L Brands shares declined only 35 cents to $64.91.
Hutchinson wrote that challenges at Victoria’s Secret combined with the decision to exit swim and direct apparel will hurt the company. The challenges at Victoria’s Secret include the shift by customers to the less-expensive bralette and the erosion of stable sales trends.
Hutchinson also thinks that the decision to cut back on direct mail promotions is bad timing as the core business at Victoria’s Secret is under pressure.
She did note that while there had been some success with the recent launch of the sports bra, the competition in the category was significant and mentioned The Gap Inc.’s brand Athleta brand and Lululemon Athletica Inc.
She does not believe focusing on athletic apparel or selling more bras will make up for the $525 million in revenue that will be lost from dropping those businesses.
Hutchinson acknowledged that the international expansion has potential, but that tourism and political risk could extend the amount of time planned for the growth of this business. Currently, L Brands is mostly in the United Kingdom, meaning that the Brexit situation could hurt sales. Hutchinson also pointed out that there were product issues with Beauty that could affect the international expansion. “We think sluggish tourism and a less differentiated assortment will weigh on sales growth,” the firm added.
The analyst sees “significant risk” to her estimates, especially in the first half of 2017, and L Brands truly exits the swim and apparel categories. She doesn’t expect to see a resumption in growth until 2018.
According to Yahoo Finance, 22 analysts have a hold rating on the company’s shares, while 11 have a buy or strong buy rating. Hutchinson is the second analyst to give the lingerie brand an underperform rating. The average target price is $69 a share.