Wells Fargo Turns Bullish On L Brands, Names 5 Turnaround Ideas

L Brands Inc LB shares traded near the $100 per share level in late 2015 and early 2016, but have since fallen around 65 percent due to multiple execution missteps, according to Wells Fargo.

Yet the bullish case for the parent company of Victoria's Secret can now be made for four key reasons, the sell-side firm said. 

The Analyst

Wells Fargo's Ike Boruchow upgraded L Brands from Market Perform to Outperform with a price target lifted from $30 to $55.

The Thesis

L Brands has proven to be slow to bring much-needed changes to its retail business, Boruchow said in the upgrade note. (See his track record here.) 

The retailer allowed its capital structure to become "problematic" due to multiple special dividends that were financed through debt, the analyst said. Yet the company now deserves credit for creating a positive narrative and positioning the company as the "next retail turnaround story."

The turnaround story can be accomplished through five initiatives, Boruchow said:

• Closing some U.S. stores at a time when the total store count is near an all-time high.
• Reconsidering international operations as losses continue to build in Europe and China.
• A product category revamp, including the reintroduction of swimwear in the hopes of adding back $450 million in lost revenue.
• Reevaluation of the televised VS Fashion Show, as viewership is down around 50 percent from five years ago.
• Slashing the dividend payout by 50 percent to a "healthy" 3-percent yield that can free up sufficient cash to fix L Brands' elevated balance sheet leverage ratio of 4x.

L Brands is showing an "all options on the table mentality" to improve sentiment and could be a rare self-help turnaround story in the retail sector, according to Wells Fargo. 

Price Action

L Brands shares were trading higher by 1.1 percent at $36.90 at the time of publication Monday. 

Related Links:

Goldman Sachs Out Bullish On L Brands, Takes Neutral Stance On Gap

Troubled Victoria's Secret Triggers Morgan Stanley's Downgrade Of L Brands

Photo by Samantha Marx/Wikimedia.