ANALYST: Victoria's Secret is trading at 'negative value'

  • Victoria’s Secret is losing an estimated $US800 million in profits, according to RBC Capital Markets analyst Brian Tunick.
  • Wall Street appears to be assigning “little to negative value” to the franchise, he said.
  • Bath & Body Works contributed over 70% of L Brands‘ bottom line this year.
  • Pink, another adjacent category, is more promotional than Victoria’s Secret.
  • Watch L Brands trade in real-time here

Victoria’s Secret’s $US7 billion franchise appears to be trading at “negative value”, RBC Capital Markets analyst Brian Tunick said ahead of its owner L Brands‘ earnings on Wednesday.

In the first half of this year, Victoria’s Secret sales rose 4% but earnings before some items fell 50%. By Tunick’s estimation, the company’s core brand is losing more than $US800 million in profits.

At the same time, Tunick expects that Bath & Body Works, an L Brands-owned franchise which provides products for personal care, will contribute over 70% of the company’s bottom line this year, compared with 40% a few years ago.

This is a showcase of “BBW’s strength and VS’s profit challenges,” Tunick said Monday in a note sent out to clients.

“While BBW continues to shine, the VS turnaround is taking longer along with rising Pink concerns,” Tunick said. “At current levels, the market appears to be assigning little to negative value to the $US7B VS franchise, which we believe could re-rate once investors see some signs of stabilisation.”

Tunick cut his price target for L Brands from $US40 to $US35 – slightly above where the shares were trading early on Tuesday – but maintained his “outperform” rating.

Randal Konik, an analyst at Jefferies, also recently published his concerns about L Brands. In a note to clients on Monday, he said the company was weakening its brand image through discounts, and this served as a red flag.

Pink, another business owned by L Brands, now offers deeper promotions than Victoria’s Secret. This makes L Brand’s business “scary,” said Konik, who has a $US23 price target and maintains an “underperform” rating on the retailer.

For L Brands’ second-quarter earnings on Wednesday, Wall Street expects $US0.35 in earnings per share on $US2.96 billion revenue.

Shares of L Brands are down 45% this year.

L BrandsEthel Jiang/Business Insider

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