Why Did L Brands, Inc. Stock Drop 12% in May?

By Markets Fool.com

Victoria's Secret has now dropped its signature catalogue. But for L Brands , the parent company of Victoria's Secret, neither dropping the catalogue nor the subsequent decision to exit swimwear has been enough to reignite investor confidence in the struggling company.

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Image source: YCharts.com.

What: L Brands had a busy quarter where it not only reported earnings, it also announced it was dropping its catalogue, and eventually getting out of the swimwear business. The catalogue announcement came in April, but the price of the company's shares continued to steadily fall.After closing April at $78.29, L Brands stock closed May at $68.55, a 12.44% drop, according to data provided by S&P Global Market Intelligence.

So what: Overall, the company's first-quarter results were not awful. It reported earnings per share (EPS) of $0.59, down from $0.61 during the same period the year before. In addition, Q1 operating income decreased 4%, to $357.9 million, compared to $371.8 million in 2015.

Those are not great -- but not awful -- results, but the real problem for investors might be that the company revised its 2016 outlook downward. L Brands decreased its full-year outlook to $3.60 to $3.80 from $3.90 to $4.10 previously.

Now what: It's hard to panic when a company actually saw its net sales grow by 4% in Q1, to 2.61 billion from $2.51 billion during the same quarter a year ago. The challenge is that retail is changing, and Victoria's Secret may face some rocky roads ahead. Dropping the catalogue is a smart move as a paper-mailed catalogue has quickly become a relic of another era.

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Ultimately, that decision should save the company money, as printing and mailing are significant expenses. Still, getting rid of the iconic sales tool that launched the company's brand is not a small decision. It may take the company years to fully make the transition, and it's hard to know what the sales impact may be.

Going forward, L Brands has a strong brand with its underwear company, and it still has the iconic Victoria's Secret Angels. The challenge will be to find ways to use the models as effectively as a catalogue, which shows up at seemingly every potential customer's house.

The company should be able to figure that out, but it may face some difficult quarters -- or even years -- getting there.

The article Why Did L Brands, Inc. Stock Drop 12% in May? originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He has never purchased anything from Victoria's Secret. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.