L Brands Is Finally Rebounding

Summary

• LB reported very strong October sales numbers.
• The stock is now up 30% off its August lows.
• We see upside to $60 as the growth narrative rebounds and the valuation normalizes.

L Brands' (LB) stock is rallying today after the company reported far better than expected October sales results and reiterated earnings guidance that many market-watchers thought was at risk of being cut. The results underscore the thesis that Bath & Body Works' (or BBW) demand remains strong, Victoria's Secret's (or VS) demand is inflecting upward, and LB stock is in rebound mode. The stock is now up 30% since its August lows, and we believe this run can continue higher. We think LB stock should trade above $60.

LB data by YCharts

Comparable sales growth has turned positive earlier than we and most expected. We were expecting comparable sales growth to turn positive in December as LB started facing negative laps; but LB reported 2% comparable sales growth in October against a positive lap (up 1% last October).

Moreover, VS turned in a positive comp month. Comps at VS were positive for the first time since November 2016, and the lap wasn't that easy (down 2% last October). Meanwhile, BBW continued its trend of a mid-single-digit rise in comps.

All of this is exceptionally bullish for LB. Operations are stabilizing and inflecting upward sooner than most expected. If the company can comp positive against a positive lap, then LB is looking at hugely positive comps in 2018 when the lap is hugely negative. Psychologically, this will be huge. Investors like buying into stories with positive comps. Better yet, investors really like buying into stories with hugely positive comps.

As far as the stock is concerned, LB remains fundamentally undervalued. The trailing P/E multiple has fallen to 14x when it has historically traded around 20x. Yet, long-term earnings growth estimates haven't come down that much (~11% to ~10%) because the company operates two retail destinations with secular appeal.

Because the earnings outlook hasn't changed all that much over the past several years, the stock's valuation should reasonably normalize to its historical average as sentiment rebounds. The five-year average P/E multiple is 20. A 20x multiple on this year's guided earnings of $3.10 implies a year-end price target of above $60.

LB PE Ratio (TTM) data by YCharts

We believe that is where LB stock will trend over the next several months. Positive comps is a huge thing for this stock. The company already has accomplished that, deepening our confidence in LB's ability to turn in 5-10% comp numbers in early 2018.

When LB does that, LB stock will keep going up. Valuation will normalize back to a 20x earnings multiple, and this stock will head back to $60.

Analyst’s Disclosure: I am/we are long LB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.