Why L Brands, Inc. Dropped 23% in March

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What happened

Stock in specialty retailer L Brands, Inc. (NYSE: LB) slumped 22.5% in March, according to data from S&P Global Market Intelligence.

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L Brands' woes began on the first day of the month, as shares lost nearly 14% in the first trading session following the company's February 28 release of fourth-quarter and full-year 2017 earnings. Although fourth-quarter sales rose 7.4%, to $4.8 billion, comparable sales improved by just 2 percentage points. Breaking down comparable sales results, "comps" at Victoria's Secret retail stores declined 6% during the last six months. Deteriorating traffic into Victoria's Secret's largely mall-based stores is a significant point of concern for shareholders -- the segment is responsible for nearly 60% of total company revenue.

I should point out that the company is offsetting some of its physical sales weakness with direct-to-consumer, e-commerce revenue. Including direct channel sales, the total comps dip in Victoria's Secret segment sales in the fourth quarter was reduced to 1%.

On a more positive note, L Brands's Bath & Body Works segment continued to exhibit momentum. Fourth-quarter store-only comps rose 4%, and with the inclusion of direct channel sales, Bath & Body Works comps jumped 6%. Management attributed the segment's fourth-quarter success to its "read and react" approach to fine-tuning the relevance of fall product collections.

Finally, one additional factor contributed to March's share-price decline. The company's February 2018 sales report, released on March 8th, displayed sales trends similar to the fourth quarter's. Overall comps increased 3%, yet Victoria's Secret store-based comps sagged by 6% against what should've been an easy comparison, given a 16% prior-year February drop.

Now what

L Brand's full-year outlook, released with fourth-quarter earnings, forecasts muted earnings per share (EPS) improvement in 2018. Management expects earnings to land between $2.95 and $3.25 per diluted share. In 2017, L Brands earned $3.42 per diluted share. Adjusting for the benefit of an extra 53rd week during the year, as well as a one-time tax benefit due to the recently enacted U.S. tax legislation, L Brands achieved core earnings of $3.09 last year.

Thus, at the midpoint of 2018's projected EPS range, earnings will essentially be flat in 2018. The company will enjoy a lower tax rate, but it's also investing $100 million in wages and benefits for hourly employees this year. Any earnings surprises will rest on L Brand's ability to invigorate its top line. Given recent traffic trends, this remains a burdensome task.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.