By Tonya Garcia, MarketWatch
L Brands Inc. would still face challenges even if it sold the struggling Victoria’s Secret brand, Jefferies analysts said in a recent note.
L Brands (NYS:LB) stock soared after a Wall Street Journal report that the company is exploring strategic alternatives for the lingerie brand, including a full or partial sale.
When asked at the time for comment, L Brands said in a statement sent to MarketWatch, “We would not comment on such rumors.”
The stock is up nearly 6% in Monday premarket trading on news that it is nearing a deal with private equity company Sycamore Partners.
The brand has struggled to find its footing as changing tastes took a toll on L Brand’s earnings. The company canceled its televised Victoria’s Secret Fashion Show and sold off or shuttered other brands in its portfolio, like Henri Bendel, in order to focus its efforts on getting Victoria’s Secret back on track.
Bath & Body Works, which has surged, would remain at L Brands if Victoria’s Secret were gone.
“Over the past decade, this business’ candle mix has risen to more than 50% of sales from about 15%, by our estimates,” wrote Jefferies in a note. “With traffic increasingly volatile, compares difficult, and candle mix at peak we don’t see much room for growth ahead for Bath & Body Works.”
Analysts also highlight the mall-dependent natures of both these businesses.
“This means that Victoria’s Secret and Bath & Body Works are highly exposed to the structural decline in mall traffic,” Jefferies said. “As such we believe Victoria’s Secret and Bath & Body Works are challenged in an increasingly e-commerce world. We see hundreds of store closures in the future as the company seeks to stem losses, which are unlikely to be offset by gains online.”
Jefferies rates L Brands stock as underperform with a $12 price target.
Both Jefferies analysts and Wells Fargo note that it’s not just the Victoria’s Secret brand that has been languishing. The Pink brand, geared to teens and college-age women, has also been increasingly troubled.
But Wells Fargo analysts see the possible transaction as an opportunity for growth. Wells Fargo rates L Brands stock as overweight with a $30 price target, and says the company is one of its “Top Picks.”
“Given that Bath & Body Works has remained one of the strongest concepts in the mall, while Victoria’s Secret comps have decelerated further… separating the Victoria’s Secret and Bath & Body Works businesses could be a possibility management should explore,” analysts said.
“Most notably, a Victoria’s Secret sale or a Bath & Body Works spinoff could unlock significant value given that L Brands shares do not appear to appropriately value Bath & Body Works outperformance.”
If Victoria’s Secret is on its own, Cowen analysts say the company will still have problems with the merchandise.
“We reiterate market perform given skepticism around a deal occurring in the near-term, and we continue to focus on Victoria’s Secret issues that remain to be addressed, namely around bra assortment and marketing,” analysts led by Oliver Chen wrote.
Cowen has a price target of $22 on Victoria’s Secret.
Cowen analysts said a sale of Victoria’s Secret or a deal that would take the underwear brand private while leaving Bath & Body Works public is most likely since L Brands holiday results missed expectations.
Jefferies analysts highlight L Brands’ debt, which topped $5 billion after the third quarter.
“We see a heavy debt load creating a large obstacle for investors that seek a split of Bath & Body Works and Victoria’s Secret,” analysts said.
The Wall Street Journal report also says Chief Executive Les Wexner is in discussions to step down from that role, though he could stay on as chairman.
Wexner has become embroiled in the Jeffrey Epstein case through a business relationship that included a role for Epstein in the Victoria’s Secret business. Wexner, who has run the company since 1963, said in a letter that Epstein misappropriated a large sum of his money.
L Brands shares are down 10.7% over the past year while the S&P 500 index (S&P:SPX) is up nearly 23% for the period.