Citi Upgrades L Brands, Says Victoria's Secret Parent Company Is Undervalued

Victoria's Secret and Bath & Body Works parent company L Brands Inc LB was upgraded by Citi on Monday, with an analyst saying the market's valuation of the retailer is overly bearish. 

The Analyst

Citi's Paul Lejuez upgraded L Brands from Neutral to Buy and lowered the price target from $46 to $38.

The Thesis

The market has become so bearish on L Brands that the valuation is "just too cheap to ignore," Lejuez said in a note. (See the analyst's track record here.) 

L Brands' situation is not an "all clear," and the company's situation could get worse before it gets better, the analyst said. 

The stock has lost almost 50 percent year-to-date for performance reasons, Lejuez said: the Victoria's Secret business is flailing, Pink recently turned negative and Bath & Body Works comps are "likely" to turn negative.

L Brands probably has too many stores, and international expansion has been rocky, he said. 

Yet Citi views L Brands as undervalued and is positive on its 7.4-percent dividend yield, Lejuez said. 

The market is valuing Victoria's Secret incorrectly at nearly zero, the analyst said. While the brand has weakened in the last two years, a drop in implied market value from $17.7 billion in 2015 to almost nothing is an "overly pessimistic" change in sentiment, Lejuez said. 

Steps that L Brands could take to strengthen its business include the following, according to Citi:

• Bringing back Victoria's Secret swimwear.
• "Democratizing" the Victoria's Secret brand. 
• Repairing L Brands' U.K. business. 

Price Action

L Brands shares were up 3.15 percent at the time of publication Monday at $33.35. 

Related Links:

Atlantic Equities Downgrades L Brands to Neutral

L Brands Apr. Comps Flat; Sees Q1 EPS At Lower End Of Previously-Issued $0.15-$0.20 Range

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