L Brands (LB) Gets Unexpected Upgrade Out of BMO Capital Markets

The last few weeks have not been great for L Brands (NYSE: LB), parent company of Victoria's Secret. Sales, both internal and external, have been on a downward trend for weeks, and the company is actually trading in a range so as to make its 52-week low look like a whole new possibility. However, there was an unexpected boost in the company's fortunes, as BMO Capital Markets offered an upgrade to the stock's outlook.

Where Did That Come From?

BMO gave the stock an upward beat from “market perform” to “outperform”, a move which undoubtedly came as a surprise to long-term stock watchers used to watching the stock careen downward like a soapbox derby racer driven by a lunatic child over the last five years.

But BMO, via analysts' note, had method to its perceived madness, noting that the company had a certain “underlying fundamental value,” a value that would likely be noticed more clearly by the larger markets now that the “noise” of a potential sale to Sycamore Partners was off the table.

In fact, in what might be called a staggering display of optimism, the note even asserted that the COVID-19 closures currently cutting L Brands' ability to operate would provide an opportunity to reconsider every aspect of the brand, and allow it to come out on the other side perhaps smaller, but also healthier. It certainly doesn't hurt that the brand features $3 billion in sales to its credit, even if those sales were mainly landed with the help of promotional offers.

With stores closed—and now closed for nearly two months straight—the company can reconsider how often promotions are offered, what its brand imaging looks like, its product line and a host of other points, all of which may help to give the company a hand up when stores are allowed to reopen. Given that some stores are actually already reopening in some states, they may want to finish that reevaluation quickly or miss the window for it to mean something.

But There's So Much Drag....

Granted, the company had some pretty impressive sales racked up, and yes, using coronavirus-related shutdowns as a way to reevaluate company goals in an environment where they likely won't have a lot of costs to meet does make some sense. Still, there's a lot working against L Brands right now, and that casts a bit of shadow on its “underlying fundamental value.” We were calling it a sell back in late March, and things haven't exactly improved since.

The attempted sale to Sycamore Partners indeed went under, at last report. A Forbes study suggested it was entirely possible that L Brands stock could drop as low as $5 a share with the deal dead, and that would make its 52-week low of $8.90 look like the good old days. It got worse from there, as the study pointed out that L Brands' revenue has been in decline for a while now—not to mention its margins—while in the meantime, its debt has also been on the rise. Don't forget word that Moody's recently downgraded L Brands' credit, essentially on the news that the Sycamore sale wasn't happening, which will make it that much harder for L Brands to go to the credit well in the future.

Fortunes Scanty as Their Product Line

Here's the problem for L Brands, at least according to the view from here. This is a heavily mall-facing retailer. Mall-facing companies weren't doing that great before the coronavirus hit; just ask Foot Locker (NYSE: FL) and The Children's Place (NASDAQ: PLCE). Come to think of it, you could ask recent bankruptcy filer J. Crew, if you could find anyone there to ask.

Yes, granted, it's got online sales components, and that should give it at least some kind of floor, but we're also going into a period of possibly protracted unemployment. Some people haven't had jobs in two months and may not have them on the other side of the coronavirus pandemic. Thoughts of restocking the unmentionables drawer with high-end hardware may go by the wayside in such circumstances.

L Brands is going to need a complete retool to come out on the other side of this, and it may not even have the resources to pull off such a retooling thanks to the debt issues going on. There is still hope, but this could be the start of a calamity in the making.