L Brands Underwhelms, Shares Look Cheap

Narrow-moat

The Victoria’s Secret segment reported in-store comparable sales down 5%, in line with our forecast, but merchandise margins contracted significantly at the brand driven by additional in-store promotions to drive traffic. We continue to expect gross margin headwinds as inventory growth outpaces revenue growth in the quarter (up 17.6% versus 8.3%, respectively), seen in our full year 38.4% gross margin estimate for the firm (down 100 basis points from last year). While in-store sales have lagged, we are encouraged by management's renewed focus on online sales that grew 22% in the quarter. We expect the firm's improved omnichannel offering will allow the firm to capitalize on the brand's strength to drive higher-margin sales.

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