Tags: l brands | turnaround | potential | dividend | yield

L Brands: Turnaround Potential and 7 Percent Dividend Yield

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Piotr Trojanowski | Dreamstime.com

By Monday, 22 October 2018 12:16 PM Current | Bio | Archive

The S&P 500 Index comprises 500 of the largest publicly-traded companies in the United States. Within the S&P 500, there are stocks that have low dividend yields, high dividend yields, and stocks with no dividend payments at all.

Income investors looking for dividend stocks should not just buy stocks based on yield alone. But in some cases, high-yield stocks are only temporarily challenged. If a company manages a successful turnaround, its low share price could be a buying opportunity.

Specialty retailer L Brands (LB) has a dividend yield above 7%, which makes it one of the highest-yielding stocks in the S&P 500 Index. And while a 7% dividend yield could be a sign of trouble, in this instance it could be a buying opportunity if L Brands can get back on the right track.

The Secret Is Out: Growth Has Slowed

L Brands is the parent company of core brands Victoria’s Secret and Bath & Body Works, as well as a few smaller brands. The company generated annual sales of $12.6 billion in 2017. Victoria’s Secret is the flagship of L Brands’ fleet, but it has experienced a pronounced slowdown in the past year. Part of this was due to management’s decision to exit the swimwear category. At the same time, Victoria’s Secret is facing escalated competition from Aerie, which has carved out sizable market share with younger consumers.

The current climate is particularly difficult for brick-and-mortar retailers. Consumers are taking their spending online, and the decline in mall traffic is a major headwind for retailers that still rely on physical stores. As a result, retailers are responding to changing consumer preferences by investing in e-commerce. L Brands reported a 25% decline in earnings-per-share in the most recent quarter, due to heightened investments in these areas. However, the company continues to grow sales. Total revenue increased 8%, while comparable sales increased 3% last quarter.

It is no secret that L Brands is having difficulty generating earnings growth. This year, L Brands expects earnings to decline approximately 19% at the midpoint of full-year guidance. However, the reason for its declining earnings is that L Brands is investing heavily in new product categories, and new markets. While these investments will weigh on L Brands’ profitability in the short-term, they are necessary to return to growth in the long run.

Investing For The Future

First, L Brands is aggressively building its e-commerce business. This is a necessary step for the company to take, as it needs to establish itself against huge e-commerce competitors like Amazon and others. Fortunately, L Brands is generating high growth from its digital segments. Direct-to-consumer sales for Victoria’s Secret rose 23% in the first half of 2018, while Bath & Body Works Direct sales increased 28% in the same period. Since 2013, L Brands has grown direct-to-consumer sales by at least 10% each year.

Another major growth catalyst for L Brands is China. Again, the company is being victimized by short-term challenges. Specifically, the recent trade tensions between the U.S. and China threaten the expansion potential of U.S. brands such as Victoria’s Secret. But there is still huge growth to be had in China. L Brands opened three stores in China in the most recent quarter. L Brands now has 10 stores open in China, with additional openings scheduled for the remainder of 2018 and beyond. As a premier emerging market with a large consumer population and high economic growth, China is a very attractive market for L Brands.

L Brands is streamlining its product portfolio to help finance its growth investments. In September, the company announced it will close all of its Henri Bendel stores. More recently, the company announced it will pursue various strategic options for its La Senza brand, which may include a closure. Henri Bendel and La Senza generated revenue for L Brands, but were money-losers. Henri Bendel and La Senza were expected to post operating losses of $45 million and $40 million, respectively, for 2018. Shedding these unprofitable brands will allow L Brands to steer investment toward its more promising growth brands and markets.

Final Thoughts

L Brands is in the middle of a turnaround, but the odds of a successful turnaround are good, as the company still has strong brands and promising growth catalysts. In the meantime, the stock appears to be undervalued. L Brands stock trades for a price-to-earnings ratio of approximately 12.6, which is a low valuation for a profitable company with competitive advantages. The combination of valuation changes, earnings growth, and dividends could result in annual returns of 19% per year over the next five years.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Specialty retailer L Brands (LB) has a dividend yield above 7%, which makes it one of the highest-yielding stocks in the S&P 500 Index. And while a 7% dividend yield could be a sign of trouble, in this instance it could be a buying opportunity if L Brands can get back on the right track.
l brands, turnaround, potential, dividend, yield
Monday, 22 October 2018 12:16 PM
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