Bank of America Merrill Lynch is reducing its 2017 EPS estimate L Brands Inc. (NYSE:LB) by $0.07 to $3.03 on weaker sales at VS and operating margin degradation at both brands. Go-forward lingerie comps were down low-double digits in 1Q, and the firm expects ongoing category weakness; in its view, higher unit sales of lower-priced bralettes and sports bras are not enough to offset the deflationary pressures of these unstructured styles. The firm reiterate its Underperform rating as it sees no signs of stabilization in the core lingerie category and expect ongoing deflation in the intimates category to pressure VS sales/margins. It is also concerned following three quarters of EBIT margin declines at BBW.
Management is hopeful that a renewed focus on structured bras will drive a 2H comp improvement at VS. The new product will hit stores as early as July but Fall is the focal point during which the company will flow newness and innovation at higher price points than those for bralettes/sport bras. Bralettes represent ~10% of total bra sales, and management does not expect this to get significantly larger. The firm sees risk to expectations for a comp inflection as well as 2Q merch margin improvement, due to an extremely promotional apparel environment and the threat of new entrants offering lower prices. It is modeling VS comp down 11%/4% in 2Q/2H.
LB reduced beauty SKU count by 40% in the back half of 2016 in order to sharpen customer focus, drive volume in key items and concentrate on fewer yet better launches. The company is also moving more beauty production to its Beauty Park in Ohio to shorten lead times in the category. Online growth is solid, and substantial margin expansion is expected to continue in 2Q. Sales results, however, remain weak both domestically and internationally as the category declined in the high-single digits in 1Q.