Yesterday, Limited Brands Co. Inc. (LB) posted generally solid results for the fourth quarter, beating analysts’ earnings estimates by nearly 7%. However, the apparel retailer shocked Wall Street with its first-quarter guidance. This quarter, L Brands expects between $0.20 and $0.25 earnings per share. This is substantially below the Street view of $0.49 earnings per share.
As to be expected, investors were spooked by this earnings announcement and sent shares tumbling nearly 16% during trading today.
This was an unpleasant surprise for holders of LB, but it emphasizes why my Portfolio Grader system is such an important resource.
For months now, my stock rating system has pegged LB at either a hold or sell due to its shaky fundamentals and lackluster level of buying pressure. Of the eight fundamental metrics that I graded LB on, it outright failed on four.
After Limited Brands’s dip, investors are asking themselves whether now would be a good time to initiate a position in the specialty retailer. I think that would be a big mistake. The hard truth is that mall traffic is declining, and it’s taking a real toll on L Brands’ stores. Limited Brands’ high-margin Victoria’s Secret business is expected to see comparable store sales plunge 20% this month. Even its popular Bath & Body Works is headed for a mid-single-digit decline in comparable store sales.
Because of this, I recommend that you stay away from this stock. Limited Brands is in the middle of a dramatic transition, and we need to let the dust settle before even thinking about getting into this play. If you’re really interested in specialty retailers like Limited Brands, I suggest that you use my Portfolio Grader tool to find the top stocks in the sector.
Until next time!