9% Downside Seen In L Brands As New Merchandise Struggles To Gain Fans

The rationale for the action? The firm said its near-term concern is based on its view that Victoria's Secret is struggling to gain traction with newness in core lingerie, pressuring ASPs and merchandise missteps causing incremental margin pressure at Bath & Body Works.

Analyst's Perspective

Analyst Kelly Halsor believes margin recovery opportunity at L Brands is facing several roadblocks this fall, resulting in incremental pricing investments and promotional activity both at VS and BBW.

See also: Victoria's Secret Issues Are 'Self-Inflicted,' But L Brands Can Bounce Back

As such, Halsor said the consensus earnings per share estimates for the fourth quarter as well as for fiscal-year 2017 are too high. The analyst noted that investors had bid up the stock by 22 percent since Aug. 30, despite indications that trends are trending below plan in the third quarter.

Buckingham Research pointed out that its concerns are primarily related to the fourth quarter, which fetches the company 50 percent of its annual EBIT. However, the firm said it is optimistic about the ability of the company's supply chain to address the issues in the first half of 2018 when comparisons are favorable.

"As such, we believe the margin recovery opportunity in FY18 and attractive 5.4% dividend limits the ultimate downside to shares," the firm said (see Halsor's track record here).

"We view the current risk/reward as balanced (20% downside/20% upside)."

The firm also listed some key upcoming catalysts to focus on:

• October sales and update on third-quarter guidance, both due on Nov. 2.
• Investor meeting at the company's headquarters scheduled for Nov. 2.
• Q3 results and update on fourth-quarter guidance, due on Nov. 1.