Fashion industry giant L Brands (LB, Financial) is a 53-year-old company with a track record of increasing sales slowly but steadily. The company went public in 1978. The stock has increased at a rate of 3.88% a year compounded annually for the last 31 years. In fact, L Brands has achieved 164 consecutive quarterly dividends.
More recently, L Brands has declined. The stock is down 13.28% over the past year. It's up 60% in the past three years, while the S&P 500 (SPY) has rallied 29% in that time. This makes the retailer look interesting as an investment.
Even with a 13% plunge, things can still turn around. While the stock may not be making new highs currently, it could recover with help from strength and growth in the years to come.
Can the company exceed expectations?
On Feb. 24, LB announced weak earnings guidance. It also forecasted "negative impacts related to continued pressure from foreign currency exchange rates and incremental interest expense related to the $1 billion October 2015 note issuance."
Earnings are now expected to come in between $3.90 and $4.10 per share, with first quarter guidance of between 50 cents and 55 cents per share. LB also beat analysts' expectations for the fourth quarter by 10 cents.
LB's management sees 2015 as a record year. With plans to open 175 stores in 2016, it expects sales to grow by mid-single digits in 2016 after experiencing 8% and 6% sales gains the past two years. Management noted "total sales growth will be about one to two points higher than comps due to growth in square footage."
In addition, L Brands has the mission of "building a family of the world's best fashion brands offering captivating customer experiences that drive long-term loyalty and deliver sustained growth for our shareholders." As to what played a key role in 2015, management stated "We also added an incremental bra launch to December, which is successful in driving newness and holiday right product for gifting and self-purchase. As a result, we had strong sales growth across our key businesses, bras, panties, sleepwear and PINK loungewear."
L Brands can still make a comeback
LB is currently trading nowhere close to their highest valuation in the last four years of 57 times earnings, currently trading at 19.08. Companies with strong, consistent growth typically command premium valuations, and L Brands deserves a premium valuation. LB has grown both net profit and sales each year over the past 10 years. In 10 years sales have grown at a rate of 2.21% year over year and net profit at 7.79% compounded annually. L Brands also has a long track record of rewarding shareholders, since it has been buying back shares at a rate of 3.08% a year over the last 10 years.
LB's sinking stock price has cut its valuation. The stock now trades for 19 times earnings, which is lower than the market's valuation of close to 22.56 times earnings.
LB also has international plans. In the most recent quarter, L Brands grew its international revenues 6%. There is even more room for the company to expand their stores. On the latest conference call, the company brought up expanding the square footage for their PINK stores to achieve sales and profit growth.
L Brands knows how merchandise and drive sales. It has already zeroed in on how to grow square footage. In the fourth quarter, store sales increased 7%. During the conference call management stated "specific to the key holiday time period in the quarter, we delivered record results, both Black Friday weekend and Cyber Monday. We continue to reposition our Beauty category to be more consistent with the Victoria's Secret brand. Results for the business were down to last year, as expected."
Going higher or lower
While the company does have its challenges, LB remains a strong, growing and profitable business. In 2016 the company expects to grow revenue by 2% to 4%.
The key takeaway for investors is that while the company has faced headwinds recently, it has not lost its core ability, growing sales and growing the bottom line. While LB may trade for a depressed valuation right now, it still has the potential to go even higher. If an apparel and retail turnaround happens, expect L Brands to reap the benefits.
