I have been very negative on shares of L Brands. Back in December, I said it was well on its way to becoming one of the worst-performing stocks in the S&P 500 for 2016.
Meanwhile, the shares get no support from Victoria's Secret as women are rapidly adopting the bralette. The bralette trend is eroding the company's main lingerie business just like yoga pants took market share from mainline apparel. In addition, the chain's exit from the swim and apparel business is killing same-store sales.
L Brands reported fourth-quarter fiscal-year 2017 (ended January) earnings of $2.03 per share, $0.13 better than the consensus estimate. Revenue rose 2.1%, year to year, to $4.49 billion.
Same-store sales were flat for the fourth quarter. By discontinuing swimwear and apparel, comps were negatively impacted by 2 and 4 percentage points, respectively.
Fourth-quarter operating margin fell 250 basis points to 22%. Gross margin declined 230 basis points to 43.3%, driven by lower merchandise margins.
For the year, adjusted operating margin was down 180 basis points to just 16.2%. Victoria Secret adjusted operating margin was down a staggering 260 basis points to 15.5%.
Even more surprising, however, was the weakness in margin at Bath & Body Works, which fell 30 basis points to 23.6%.
While the fourth quarter was a mess, investors didn't expect a total disaster in the first quarter. Management guided first-quarter fiscal 2018 comps down high-single-to low-double digits. Gross margins are expected to be down "significantly" from 40.3%. The company said SG&A expense will be up "significantly" from 26.6% and EPS would range from $0.20 to $0.25.
For 2017, management guided EPS to $3.05-$3.35 versus the consensus of $3.68.
I would continue to avoid shares of L Brands, until the company can get a handle on the negative trends that are affecting its business.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.