L Brands Stock: An Opportunity for Bulls... or Bears?

LB is hovering near 52-week highs, but has fundamental issues

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L Brands, Inc. (NYSE:LB) is an American fashion retailer that owns the popular Victoria’s Secret brands, as well as Bath & Body Works. Back in February of this year, L Brands announced an agreement to sell the Victoria’s Secret brand to Sycamore Partners, but the deal fell through. L Brands then announced its plans to sell its majority stake in its Victoria’s Secret UK business just this past September. Based on the company's poor revenue and profit numbers in recent years, the possibility of bankruptcy seems very real for L Brands, especially as it continuously looks to offload one of its major brands.

The company is set to report earnings next week after the close on November 18 and that quarterly financial report will likely play a huge role in the future direction of its stock price. L Brands has beat expectations on half of its earnings reports over the past 12 months. In the company's fiscal fourth quarter of 2019, L Brands stock met its earnings per share (EPS) expectation of $0.02. In the fiscal first quarter of 2020 for L Brands, the company beat expectations by $0.02, reporting an EPS of $1.88. In the following quarter of this year, L Brands stock's EPS dropped to -$0.99, missing expectations by $0.27. Most recently, L Brands beat its target by $0.67 for their fiscal third quarter of 2020. The company reported an EPS of $0.25 instead of the expected EPS of -$0.42. As for the upcoming earnings report slated for next week on Wednesday, L Brands is expected to report an EPS of $0.06.

LB stock is currently up 84% year-to-date in 2020 and a massive 327% from its 11-year low of $8.00 on March 17. LB stock is sitting just a chip-shot off its 52-week high from Oct. 17. As for L Brands dividends, the company cut its dividend in the second quarter of this year. L Brands last paid a dividend of $0.30 per share in the first quarter of 2020.

Options traders are loading up on puts. The stock's 10-day put/call volume ratio of 2.62 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands higher than 98% of readings in its annual range. In other words, this suggest that long puts are being picked up at a relatively faster-than-usual pace. Should this bearish sentiment begin to unwind, it could catapult the equity higher. 

That said, speculating on LB next move with options could be a prudent play. The stock's Schaeffer's Volatility Index (SVI) of 89% stands higher than just 20% of all other readings in its annual range, implying that options players are pricing in relatively low volatility expectations at the moment. 

LB had been in a consistent state of decline since peaking in 2015. However, the stock has almost inexplicably turned bullish in 2020, despite its terrible numbers and the COVID-19 pandemic. In 2016 L Brands' annual revenue growth hit a plateau and that is has yet to be overcome. L Brands went from producing over a $1 billion in net profits in 2016 to posting a nearly $800 million loss over the past 12 months. The company’s net income has slowly dwindled year after year, even turning unprofitable on the year prior to the pandemic. Fundamentally, the red flags are staggering and could give a fundamentals-only investor reasonable pause.

 

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