L Brands stock is on the rise thanks to a recent upgrade.
Bank of America analyst Lorraine Hutchinson upgraded the parent company of Victoria’s Secret and Bath & Body Works in a note on Friday, causing the retailer’s shares to surge more than 8 percent.
“We are upgrading [L Brands] from neutral to buy,” Hutchinson wrote. “We think its inexpensive valuation, a high-dividend yield, strong and growing Bath & Body Works business and potential for stabilization at Victoria’s Secret make this a compelling investment.”
While the analyst called Bath & Body Works “arguably one of the best stories in retail,” she also pointed out that L Brands’ weakest link continues to be the Victoria’s Secret brand. The lingerie business has been battling declining sales and changing consumer preferences for the last few years, as shoppers gravitate toward brands that promote body positivity and inclusion.
“In fact, we think the brand is at a tipping point; if holiday results do not stabilize, the concept’s proximity to losing money should cause management to re-evaluate the brand image and marketing message,” Hutchinson wrote.
Retailers often count the fourth quarter as their highest-grossing quarter in terms of both sales and profits. This year’s shorter stretch between Thanksgiving and Christmas — when shopping goes into overdrive — hasn’t helped anyone in the industry.
While L Brands hasn’t revealed its holiday sales figures, Victoria’s Secret did disappoint during its most recent quarter, falling short on both the top and bottom lines. Moreover, almost all of the gains at the company, which includes Pink in the greater portfolio, are from the Bath & Body Works business.
Meanwhile, executives at L Brands said they’re hard at work trying to reposition Victoria’s Secret and update its image.
“We think it’s important to evolve the marketing of Victoria’s Secret,” Stuart Burgdoerfer, L Brands’ chief financial officer and executive vice president, said on the company’s November conference call. “That is happening in certain respects now. And I think there will be more to come as that continues to get evaluated.”
Burgdoerfer also confirmed that the annual Victoria’s Secret Fashion Show has been canceled — at least for now. But Hutchinson wrote in her note that it may be too late.
Instead, Hutchinson said more proactive turnaround steps would include reincorporating private-label swimwear into both the Victoria’s Secret and Pink brands, trimming the company’s large real estate fleet and even shaking up the existing L Brands’ board.
“We think continued work is needed to allow for a broader perspective and that adding more women and younger board members could foster better idea generation,” Hutchinson wrote.
Shares of L Brands are down nearly 35 percent year-over-year.